However, the central bank also announced a larger-than-expected government borrowing plan through short-dated paper for the January-March quarter, and traders said bond yields could rise a further 8-10 basis points on Monday.

“The increased borrowing through dated securities was more or less expected. But that number coupled with the net increase in T-bill borrowing is a lot more than the market was expecting,” said Nirav Dalal, president and managing director, debt capital markets at Yes Bank in Mumbai.

“I don’t think the bond market is going to like it.”

India’s fiscal position has been deteriorating as economic growth slows. Anticipation that New Delhi would borrow additional funds has been weighing on Indian markets.

The yield on the benchmark 10-year federal bond hit a three-week high on Friday as the market braced for more borrowing.

It ended at 8.56 percent after touching 8.60 percent, its highest since Dec. 7 and 2 basis points higher than Thursday’s close, before the new borrowing calendar was announced.

Earlier on Friday, the government said its fiscal deficit for the first eight months of the financial year ballooned to nearly 86 percent of its full-year target.

The government is widely been expected to miss its fiscal deficit target of 4.6 percent of GDP for the fiscal year that ends in March by a full percentage point or more.

The new T-bill schedule brings the fiscal year’s net borrowing through those securities to 650 billion rupees, from the 150 billion rupees budgeted, according to Yes Bank’s Dalal.

This would need to be refinanced through borrowing or other sources in the next fiscal year, he said.

“This does not bode well for next year’s fiscal deficit,” he said.

The additional supply will add further strain on tight money market liquidity, and is likely to spur the central bank to continue to buy back bonds through open market operations (OMO), traders said.

The Reserve Bank of India has bought 412.1 billion rupees in bonds through open market operations since late November.

It may buy back a further 600-800 billion rupees in bonds through open market operations in the remainder of the fiscal year, said Ashutosh Khajuria, president of treasury at Federal Bank.

Mohan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai, said he expected the benchmark bond yield to open at 8.65 percent on Monday.

“It may be difficult to absorb this kind of additional borrowing unless there is OMO,” he said.

“Yields should settle down in the 8.65-8.70 percent range if OMO is there, but if OMO is not there or the market gets disappointed on the extent of OMO then it can go even up to 8.85 or so,” he said.

In late September, New Delhi increased its borrowing plan for the second-half of 2011/12 to 2.2 trillion rupees, from the budgeted 1.67 trillion.

Friday’s additional planned borrowing will bring the total for the fiscal year to 5.1 trillion rupees.

The revised bond market borrowing schedule, which traders had expected would be announced on Monday, will take place starting in the first week of January and run through the week of March 5-9, the RBI’s new borrowing calendar showed.