At 12 p.m. (0630 GMT), the benchmark 10-year bond yield was down 4 basis points at 8.34 percent, adding to the 11 bps drop on Friday after the Reserve Bank of India (RBI) kept rates unchanged but signalled a shift in its hawkish policy stance.
"The yield should trade in a 8.00 to 8.25 percent range in the next few days as the market starts building in rate cut expectations," said Sandeep Bagla, senior vice president at ICICI Securities Primary Dealership.
Total volumes on the central bank's electronic trading platform were sharply higher at 117.45 billion rupees ($2.21 billion), compared with the usual 50 billion rupees usually dealt in the first three hours of trade.
The RBI paused an aggressive tightening cycle that involved lifting rates 13 times since March 2010, as the economy tussles with a worrying combination of weak growth and high inflation.
Demand for bonds was aided by domestic shares that fell more than 1.5 percent on slowing growth, while lower global oil prices was seen cooling inflation pressures.
Brent crude futures fell below $103 on Monday on worries that Europe's debt woes could trigger a global recession, but losses were limited by signs China's oil demand would hold up as its economy headed for a moderate slowdown.
Traders said the bond market was also underpinned by risk aversion globally on instability fears a leadership transition could bring following North Korean leader Kim Jong-il's death and as investors await more developments and ratings downgrades from Europe.
The benchmark five-year swap was down 10 basis points at 6.82 percent and the one-year rate INRAMONMI1Y=> shed 6 bps to 7.65 percent.
BORROWING WORRY
However, expectations the government, which has already increased its borrowing plan for the fiscal year to March, will again announce additional borrowings could halt the rally in bond prices, traders said.
Last month, the finance minister sought parliamentary nod for a net additional spending of 568.5 billion rupees for 2011/12, increasing fears the government will not be able to meet its fiscal deficit aim of 4.6 percent of GDP.
A senior dealer at a primary dealership said there was market talk the government would have to borrow another 400 billion rupees.
"This may pressure the yields up by 10-15 basis points from where it stands," he said.
India's fiscal deficit is likely to breach the budgeted target and reach 5.5 percent of gross domestic product in the current fiscal year, forcing New Delhi to borrow 353 billion rupees more from the market, a Reuters poll showed.
The government in late September increased borrowing in the second half of the fiscal year to 2.2 trillion rupees from the budgeted 1.67 trillion rupees, but said this was unlikely to impact the fiscal deficit target.