"Combined CRR (cash reserve ratio), SLR (statutory liquidity ratio) at 30 percent is still quite high and needs to come down, but that has to happen gradually," RBI Governor Duvvuri Subbarao said.

A likely rise in commodity prices on hopes of more stimulus measures for the United States stoked inflation fears, which also weighed on the sentiment for bonds, traders said.

At noon (0630 GMT), the 10-year Indian benchmark bond yield was at 8.29 percent, compared with Monday's close of 8.28 percent.

Total volume on the central bank's electronic trading platform was at 81.15 billion rupees ($1.76 billion).

"There are concerns of commodity prices going up if there is more economic stimulus in the US, and the inflation fears in India continue," said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai.

Brent crude was steady at above $110 a barrel on Tuesday, as the market weighed expectations for further economic stimulus in the US against a worsening euro zone debt crisis.

India's food price index rose 10.05 percent, its highest in nearly six months, and the fuel price index climbed 12.55 percent in the year to Aug. 20, data showed last week.

Traders expect the 10-year bond yield to trade in a range of 8.24-8.30 percent intraday, and said the market will await comments from the RBI to gauge its stance before the policy review on Sept. 16.

The market had been expecting the RBI to raise its repo rate for the 12th time since March 2010 in the policy review. But, after the finance minister's dovish comments on Monday, the probability of a rate increase has faded.

The Business Standard newspaper quoted Pranab Mukherjee as saying the central bank may not increase its key lending rate further as it will impact growth.

Traders said the market will also watch the July factory output data and the headline inflation number for August due next week for cues ahead of the policy.

The benchmark five-year overnight indexed swap rate was at 6.80, down 2 basis points from previous close, while the one-year rate was at 7.56 percent, from 7.61 percent.

The benchmark US 10-year note yield was trading at 1.94 percent after touching 1.91 percent -- its lowest in at least 60 years. It had fallen more than 10 basis points on Friday to 2.01 percent in New York. The US financial markets were closed on Monday for Labor Day.