* Results of auction however show only tepid interest
* RBI's Gokarn says OMOs to be conducted based on liquidity needs
* Govt may withdraw withholding tax for FIIs for bonds - report
By Subhadip Sircar
MUMBAI, July 4 (Reuters) - Indian federal bond yields fell for a second session on Wednesday on hopes of strong demand from foreign investors at an auction to sell new debt limits.
The capital markets regulator will sell $5 billion of limits to overseas investors after the government raised the ceiling for foreigners to invest in government paper to $20 billion. The additional limit can be invested in papers which have a residual maturity of at least three years.
The increase in debt limits was part of the government's efforts announced in June to prop up the rupee and revive investor sentiment in the economy.
"Limits are available to foreign investors at very cheap prices so it's likely there will be demand," said a trader with a primary dealership.
However, post market close, sources told Reuters the debt limit auction met only with tepid investor response due to investment restrictions in the auctioned limits and because of thin participation by some investors on account of a U.S. holiday.
Bonds were further boosted after Bloomberg-UTV reported that the government may remove the withholding tax on bonds for foreign investors.
"I am leaning towards further flattening of the curve in the back end, as the market sees current entry for Indian bonds rather cheap," said Suresh Kumar Ramanathan, regional rates and foreign exchange strategist at CIMB Investment Bank in Kuala Lumpur.
The most traded 9.15 percent 2024 bond fell 3 basis points to 8.38 percent while the 10-year bond fell 3 basis points to 8.33 percent during the session.
The benchmark 10-year bond ended 2 basis points lower at 8.16 percent.
The absence of any open market operation announcement so far this week, however, kept a floor on yields.
Subir Gokarn, a deputy governor at the Reserve Bank of India, said open market operations will be conducted based on the liquidity situation and were unrelated to rupee movements.
The one-year OIS rate closed down 2 basis points at 7.79 percent, while the five-year rate fell 1 bp to 7.21 percent. (Editing by Anand Basu)