* Bond yields edge lower on global risk aversion
* Lack of new 10-yr debt disappoints markets
* More OMOs seen, possibly this week
By Subhadip Sircar
MUMBAI, May 22 Indian federal bond yields fell slightly on Tuesday after continued global risk aversion offset disappointment the central bank had refrained from announcing a new 10-year paper at its auction this week.
Traders had anticipated the Reserve Bank of India would announce a new 10-year paper late on Monday when it announced the mix of the debt it will sell at the end of the week as part of its weekly auctions.
Instead, the RBI will sell more of the existing 2021 benchmark bonds, despite a ballooning outstanding issuance, in what traders saw as a tactical move intended to increase the supply of this maturity to facilitate bond purchases.
These buybacks done via open market operations could be key to Indian debt markets, as the rupee continues to drop to new record lows, although the central bank has not been intervening aggressively since Thursday.
"It looks like the RBI will support the market via continuous OMOs. The benchmark yield may move to 8.45 percent on the support," said Harish Agarwal, dealer with First Rand Bank in Mumbai.
The benchmark 10-year bond yield ended at 8.52 percent, 2 basis points lower than Monday's close.
Global risk aversion has been front and centre in Indian markets since last week, with the rupee and stocks dropping further after Fitch downgraded Japan's sovereign ratings citing a heavy debt burden.
A risk off global sentiment is favorable to local bonds, though the market is largely domestic investor driven.
Although the central bank has chosen not to intervene in FX markets in recent days, traders say more action is likely.
Any dollar sales would increase hopes of OMOs. The RBI has already purchased bonds in each of the previous two weeks in order to offset the impact on rupee liquidity from its dollar sales in forex markets.
RBI Deputy Governor Subir Gokarn said on Monday the central bank could do OMOs this week, though no official announcement has followed.
Cash conditions also remain tight, with repo borrowings on Tuesday nearly hitting 1 trillion rupees, well above the RBI's comfort zone.
One-year OIS rate closed steady at 7.99 percent while the five-year rate rose 2 bps to 7.46 percent. (Editing by Rafael Nam)
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