By 10:30 a.m. (0445 GMT), the 10-year benchmark bond yield was down 1 basis point at 8.73 percent after moving in a 8.72 to 8.74 percent band. It had hit 8.80 percent during trade on Tuesday, its highest since Aug. 28, 2008.

Total volumes on the central bank's electronic trading platform were at a low 15.60 billion rupees ($318 million) compared to the normal 30 to 40 billion rupees dealt in the first hour and half of trade.

"A slight dip in oil prices has helped bonds but looks likely to be rangebound," said Reshma Nayak, a fixed income trader with Saraswat Co-operative Bank.

"Tomorrow's inflation number will be crucial. Likelihood of high inflation and the auction is seen continuing to weigh. For now there seems to be a strong support for bonds around 8.77 percent, while 8.68 percent is an immediate resistance".

The Reserve Bank of India, which has raised rates a dozen times since mid-March 2010, is set to review policy on Oct. 25 and the possibility of another increase has been weighing on bonds.

Controlling inflation remains one the most important items on the agenda, Subir Gokarn, a deputy governor at the bank, said post market hours on Wednesday at an industry event in Jaipur.

He said that while oil and food prices were putting pressure on inflation, a moderation in growth will help ease inflation.

Brent crude fell to near $111 on Thursday, snapping six days of gains, after trade data from China pointed to slower demand in the world's second-largest oil consumer.

Weekly food and fuel price data, due around noon (0630 GMT)will be watched for cues on broader inflation, traders said.

Monthly headline inflation is due on Friday. The wholesale price index probably rose 9.70 percent in September from a year earlier, easing slightly from 9.78 percent in August, a Reuters poll showed.

Sustained domestic bond supplies are also seen weighing. The government is set to sell 130 billion rupees of bonds on Friday, including 40 billion rupees of 7.83 percent 2018 bonds, 60 billion rupees of 7.80 percent 2021 bonds and 30 billion rupees of 8.26 percent 2027 bonds.

Traders broadly forecast an 8.70 percent to 8.80 percent range for the bond until the auction this week.

"The market is trading in a range as of now after quite a steep movement in recent sessions. The market is already betting on a 25 bps hike on Oct. 25, so guess yields are taking a breather here before it starts its upward movement again," a senior trader with a private bank said.

The benchmark five-year overnight indexed swap rate was down 1 bp at 7.36 percent, while the one-year OIS rate was down 2 bps at 8.04 percent.