State-run refiners said late Tuesday they would cut gasoline prices by about 3.2 percent from Wednesday, the first reduction in three years.

By 10:45 a.m. (0515 GMT), the new 10-year bond yield was at 8.89 percent, 1 basis point (bp) above its close on Tuesday, when it had eased by 8 bps. So far in the session, the yield has stuck in a narrow 3 bps range.

Total volume on the central bank's electronic trading platform was slightly lower at 30.45 billion rupees ($598 million) compared to the normal 35-45 billion rupees dealt in the first two hours of trade.

"Bonds closed on a bullish note and opened bullish again. But profit taking is emerging at these levels before we can see further buying. However, the petrol price cut is a positive," said Anoop Verma, an associate vice president with Development Credit Bank.

"I expect a 8.90 percent to 8.95 percent band on the 10-year paper today."

Traders said hopes of the Reserve Bank of India possibly taking measures to ease tight liquidity in the banking system was also aiding sentiment to some extent.

Banks borrowed 1.06 trillion rupees ($20.9 billion) from the central bank's repo window on Tuesday, compared with 916.35 billion rupees on Monday and sharply higher than 495.25 billion rupees borrowed at the end of the first week of November, reflecting the tightness in cash conditions.

Demand for bonds was also tempered because of a 130-billion-rupee ($2.6 billion) auction on Friday.

"The petrol price cut and lower euro are helping the market. But upside on bond prices would be capped due to profit taking, unless euro really cracks out," a senior dealer with a private bank said.

Asian shares and the euro fell on Wednesday as signs that rising borrowing costs were affecting AAA-rated France stirred fears that even core euro zone members may not escape contagion from the region's debt crisis.

The benchmark five-year swap and the one-year rate were both up 1 basis point each at 7.32 percent and 8.12 percent respectively.

"Tight cash conditions will not let swap rates fall too much in the near-term. The five-year, however, is likely to fall more than the 1-year, with 7.25 being the next target," a senior dealer with a foreign bank said.