The RBI had planned to buy up to 100 billion rupees ($1.35 billion) worth of six-year to 11-year papers at an open market operation. But despite receiving bids worth 664.73 billion rupees in total, it did not accept any of them.

"The RBI seems unhappy with the bids offered. If the market is in stress as (traders) say they are due to the high supply, (the market) should be selling at reasonable levels," a senior trader at a private bank said.

"It is possible that RBI, which is also buying in the secondary market, feels that they can get better results there".

The benchmark 10-year bond yield rose to a session high of 6.03% after the OMO results were announced but ended the day steady at 5.99%.

The central bank extended market trading hours by a total of two hours, which traders said reassured the market and suggested the RBI will buy bonds in the secondary market despite rejecting the bids at the OMO.

Several traders had been hopeful of more OMOs to help cope with the government's record market borrowing of 12 trillion rupees this fiscal year, which could go up further if tax revenues remain muted and the government fails to raise funds from other avenues like divestments.

After Thursday's failed auction however, the RBI announced another round of simultaneous purchase and sale of bonds worth 100 billion rupees each on Oct. 1, similar to the U.S. Fed-style 'Operation Twist', continuing with its practise thus far.

"The RBI seems to suggest that they don't want to add to market liquidity. Market will take it negatively," said A. Prasanna, an economist with ICICI Securities Primary Dealership.

($1 = 73.8932 Indian rupees)

By Swati Bhat