The yield on a popular 5-year bond maturing on 2018 spiked to as much as 11.70 percent, from Friday's 11.48 levels, before closing at 11.60/63 percent levels, amid foreign selling, dealers said.
There have been large outflows from other emerging markets as the US dollar strengthened and long term yields rose.
Central Bank Governor Nivard Cabraal said the overall total foreign bond holdings were steady at around 12.5 percent of total holdings.
"Within the limit there are buyers are sellers. It always happens," Cabraal said." We have had new investors coming from the Middle East.
Japanese investors are coming into our bonds.
"
Amid higher international risk perceptions foreign investors have sought to minimise risks by shortening maturities and also covering their forward forex risks.
Foreign investor holdings of Treasury Bills rose to 74 billion rupees on June 19 from 70.
5 billion rupees on June 12 as Treasury bond holdings fell from 417 billion rupees to 424 billion rupees.
"That is a call that investors can take," Governor Cabraal said. "We like it where there is trading.
It shows the depth in the market and liquidity. And investors would also be happy that there is a market being created.
"
As the 5-year bond rose to 11.70 percent Monday there were bids in the market from a large state fund, dealers said.
In the secondary market one year bills were quoted around 10.
80/85 percent, but they could edge slightly lower amid stronger interest from foreign investors, some dealers said.
In the forex markets the spot US dollar closed at Spot closed 128.85/90 levels, after being quoted weaker at 128.85/129.05 levels in morning trade.
There was sporadic state selling to selected banks from a state lender that usually acts for the monetary authority, dealers said.
Analysts say the current weakness of the rupee is partly due to pressure from about 20 billion rupees in excess liquidity that is generating demand. Liquidity can be killed either by dollar sales or Treasuries sales by a Central Bank.
Market excess liquidity dropped to 9.
2 billion rupees Monday from 14.2 billion on Friday.
Dollar sales by central bank that kills liquidity (unsterilized sales) helps strengthen an exchange rate.
But dollars sales which are followed by liquidity injections (sterilized sales) adds new demand and can put further pressure on a currency.
Bond purchases by a Central Bank, or liquidity given by a monetary authority to banks or primary dealers to buy bonds can also weaken the exchange rate and generate balance of payments pressure.