The OMO sale of government securities was withdrawn due to "recent market developments and based on a fresh review of the current and evolving liquidity conditions", the RBI said in a statement on Friday.
The announcement may kick-off a short-lived rally next week in the bond market, with the 10-year government bond yield likely to fall by 5 basis points, traders said.
"There will be a rally on Monday after the OMO news, but it won't sustain. Many traders have burnt their fingers already and they are not ready to keep buying," said a dealer with a private bank.
The 10-year bond yield ended at 7.05 per cent, after hitting a low of 6.94 per cent earlier in the day after Moody's upgraded India's sovereign rating.
Continuous OMO sales have been a key reason for the massive sell-off in the bond market since June-end, in addition to concerns over inflation and fiscal discipline.
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