(Updates with closing levels for OIS)
* 10-year yield ends 1 bp lower at 7.74 pct
* India buys 96.58 bln rupees in debt vs 100 bln it offered to buy
* Hopes of more OMOs rise as repo bids cross 1 trln rupees
By Archana Narayanan
MUMBAI, May 7 (Reuters) - Indian government bond yields eased on Tuesday on expectations the central bank would continue to buy debt via open market operations after lenders borrowed more than 1 trillion rupees from it, signalling tight liquidity conditions.
The Reserve Bank of India bought back 96.58 billion rupees of bonds on Tuesday, marginally lower than the 100 billion rupees it offered, marking the first open market operation (OMO) debt purchase in the fiscal year that started in April.
Expectations the RBI would conduct more OMOs to inject liquidity helped remove some of the disappointment last week, when the central bank cut interest rates for the third time in 2013, but signalled little room for easing monetary policy further.
The optimism comes even after RBI Governor Duvvuri Subbarao said on Monday the central bank would consider all the options available to tackle the tight liquidity in the market and not just confine itself to bond purchases.
"The market expects today's OMO to be the first of many to come as supply in the near term is very large and OMOs are crucial for near-term stability of the market," said Ramana Chegu, head of asset liability management at ING Vysya Bank Ltd, Mumbai.
The benchmark 10-year yield edged 1 basis point (bp) lower to 7.74 percent.
India will auction 150 billion rupees of bonds on Friday, as part of plans to borrow a total of 3.49 trillion rupees between April and September.
The heavy schedule of auctions come as repo borrowings surged to 1.01 trillion rupees ($18.63 billion) on Tuesday as the banking system continued to face a large cash squeeze because of lower government spending.
Still, the market is likely to be range-bound from 7.67 percent to 7.77 percent in the near term as it awaits macro-economic triggers such as the consumer price index and industrial production data due on Friday, said Chegu.
Those reports will be followed by wholesale inflation data on Monday.
India's one-year overnight interest swap (OIS) ended 1 bp higher at 7.25 percent and the five-year swap rate was also 1 bp up at 6.95 percent. ($1 = 54.2250 Indian rupees) (Editing by Prateek Chatterjee)