The Reserve Bank of India last week said it would conduct a variable-rate reverse repo auction for 2 trillion rupees ($27 billion) on Jan. 15 after a review of the evolving liquidity and financial conditions.

Markets read the release as an indication that the RBI was looking to roll back the massive cash surplus in the banking system, despite its reiteration that it will ensure availability of ample liquidity.

"The market is confused about what the RBI is trying to do. A lot of times it feels like the RBI doesn't realise the fallout of its actions and then tries to balance it out," said a senior debt trader at a private bank.

The benchmark 10-year bond yield ended at 5.99% versus 5.93% on Thursday, its first weekly rise in three and its biggest since the week ending Sept. 11.

Traders said the absence of a special OMO announcement for next week after three consecutive weeks of such auctions also hurt demand for bonds. They said they expected yields to rise further if there was no announcement by end of day.

The government raised 224.55 billion rupees via a bond sale while the central bank set a cut-off of 3.55% at its 14-day variable-rate reverse repo auction.

Traders said the yield cut-off was high but follow-up auctions and consistency in RBI's actions would be key for it to make any real difference.

"The RBI has taken the first step towards reverting to pre-COVID liquidity management operations in a phased manner," Upasna Bhardwaj, economist at Kotak Mahindra Bank, wrote in a recent note.

"The rate up to which the RBI will be comfortable accepting bids in the variable-rate reverse repo auction will provide a key signal on its intent and, consequently, the interest rate trajectory."

($1 = 73.0550 rupees)

(Reporting by Swati Bhat; editing by Subhranshu Sahu, Larry King)

By Swati Bhat