The easing also reflects expectations of continuity of OMOs by the Reserve Bank of India as the cash strain in the banking system remained severe.

Debt markets also benefitted from a safe-haven bid, as domestic stocks came under pressure as lenders were hit by profit-taking.

"We expects OMOs to continue, thus bond yields would be capped," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank, who expects bond yields to be limited to 8.20 percent.

A severe liquidity shortage is expected to continue till the month end, but some respite is likely with government spending in the first week Janauary.

Nayar expects the central bank to continue with OMOs till the time the liqiuidity deficit is above 1.25 trillion rupees.

The RBI bought 79.12 billion rupees ($1.4 billion) of government bonds through open market operations (OMO) on Friday, compared with the notified 80 billion rupees.

Bonds were also supported by aggressive cut-offs at a central bank auction.

India sold 120 billion rupees ($2.18 billion) of bonds on Friday, which saw aggressive bidding in the 8.07 percent 2017-July bonds and 8.97 percent 2030 bonds.

The benchmark bond yield ended down 1 bp at 8.14 percent, after trading in a narrow range of 8.14 percent to 8.16 percent.

Dealers expect the year-end portfolio reshuffling coupled with government spending flowing back to the system to be bond-supportive for the remainder of the current month.

Long-end 5-year OIS rate was at 7.17 percent, 1 basis point (bp) higher than the previous close, while the short-end 1-year rate was up 2 bps at 7.67 percent.