MUMBAI: Indian government bonds inched up on Tuesday after the market absorbed a large state debt supply, though gains were capped by a liquidity crunch and approaching quarter-end that curbed risk appetite. The benchmark 10-year yield settled at 6.5786%, compared with Monday’s close of 6.5912%. Bond yields rise when prices fall. Indian states raised 354.50 billion rupees ($3.95 billion) through bond sales on Tuesday - the biggest such issuance in over three months - at expected rates, offering relief to traders who had been worried about a supply overhang due to the large size of the auction. A widening liquidity squeeze still weighed on sentiment, with the banking system in cash deficit since December 16 and the shortfall at 715.8 billion rupees as of Monday. The central bank conducted a two-day variable-rate repo auction worth 2 trillion rupees on Tuesday to support liquidity and received bids worth 1.43 trillion rupees. To further boost liquidity, the Reserve Bank of India will buy bonds worth another 1.5 trillion rupees in January, alongside a $10 billion foreign exchange swap. It has already purchased a record 7 trillion rupees of bonds in 2025. The OMOs, aimed at maintaining durable liquidity, would help bridge the gap between issuance and demand, ensuring smoother absorption of supply, Axis Mutual Fund said in a note. The focus is also on the possible inclusion of India’s fully accessible route (FAR) bonds in the Bloomberg Global Aggregate Index, and state borrowing calendars for the fourth quarter. Separately, trading volumes in government bonds remained tepid, slipping to 316.4 billion rupees ($3.53 billion) on Monday, the lowest in over two months, according to clearing house data. RATES India’s overnight index swap rates eased on Tuesday as traders breathed a sigh of relief after the state debt supply was fully absorbed. The one-year OIS ended 3 basis points lower at 5.45% and the two-year OIS rate fell about 2 bps to 5.56%. The five-year OIS rate settled 1.25 bps down at 5.9225%.