At 9:20 a.m., the benchmark 10-year bond yield was at 8.31 percent, up from 8.28 percent on Monday, its lowest since Sept. 12. It has traded in the 8.27 to 8.31 percent range until now.

After market hours on Tuesday, the Reserve Bank of India said it will buy back the 8.07 percent 2017, 7.80 percent 2021, 8.08 percent 2022, and 8.28 percent 2027 bonds.

The market will continue to see buying in the morning. "I see rangebound trading in the day," said Pradeep Madhav, managing director of STCI Primary Dealership, as call rates remain high and liquidity is tight.

The deficit in the banking system stood at 1.64 trillion rupees on Tuesday, far above the RBI's comfort level of about 600 billion rupees.

Indian banks borrowed 16 billion ($303.6 million) rupees through the central bank's marginal standing facility on Dec. 20, the Reserve Bank of India said on Wednesday, a reflection of liquidity strain in the banking system.

India's central bank sent a strong signal last Friday that its next move is likely to be an easing of monetary policy as risks to economic growth increase, but left its policy rate on hold at a three-year high as it acknowledged high inflation.

The government is set to sell 40 billion rupees of 7.83 percent 2018 bonds, 50 billion rupees of 8.79 percent 2021 bonds, and 30 billion rupees of 8.97 percent 2030 bonds on Friday.