At 10:20 a.m. (0450 GMT), the 10-year benchmark bond yield was at 8.77 percent, after hitting 8.80 percent in early deals, its highest since Aug. 28, 2008, and up 2 basis points on the day. It had jumped 18 bps on Monday, after trading in the paper resumed after a two-day break.

The market was closed last Thursday for a local holiday, while trading in the bond was shut on Friday for coupon payments.

Total volumes on the central bank's electronic trading platform were at a moderate 27.70 billion rupees ($565 million).

"We are possibly heading towards 9 percent or may be even higher. Auction papers were, however, largely in line with expectations," said Anoop Verma, an associate vice president with Development Credit Bank.

The government will sell 130 billion rupees ($2.65 billion) of bonds on Friday, including 40 billion rupees of 7.83 percent 2018 bonds, 60 billion rupees of 7.80 percent 2021 bonds and 30 billion rupees of 8.26 percent 2027 bonds.

Traders said there was some support seen for bonds around the 8.80 percent mark as investors bought bonds after prices fell sharply in recent sessions.

They forecast an 8.70 to 8.85 percent range on the 10-year paper until the auction this week.

The market will take into account industrial output data on Wednesday and September inflation data on Friday to cement its view on whether Reserve Bank of India will raise rates when it reviews policy on Oct. 25.

Industrial output probably grew 5.0 percent in August from a year earlier, on a favourable statistical base effect, despite successive rate rises slackening the pace of growth, a Reuters poll showed.

"Yields are off their highs now as some short-covering has been triggered. The near-term bottom may have been formed, but we need to wait for the auction," a senior fixed income dealer with a private bank said.

"Almost everyone who were short bonds and were looking at a short-term trend expecting a bounce are looking to buy around 8.80 percent levels," he added.

The benchmark five-year overnight indexed swap rate was at 7.37 percent, steady from previous close, while the one-year OIS rate was at 8.09 percent, up 1 basis points from previous close.