Meanwhile, commentary from Goldman Sachs on including Indian bonds in global indexes aided sentiment.

The benchmark 10-year government bond yield ended at 7.1825%. after closing at 7.2894% on Friday. The yield posted its biggest single session fall since Jun. 20. Indian fixed income markets were shut on Monday and Tuesday for holidays.

"Every factor was working in favour of bond bulls today, while oil led to sharp opening gains, comments on index inclusion saw participation of foreign players further leading to fall in yields," said Nandan Pradhan, deputy general manager, treasury, at Cosmos Bank.

Global oil prices dropped, with the benchmark Brent crude contract declining to its lowest level in six months on Wednesday, amid concerns about a potential global recession.

The crude contract was trading down for the fourth day on Wednesday at $92 per barrel, closer to a level last seen before Russia invaded Ukraine. As India imports bulk of its crude oil requirement, falling oil prices could lower inflation.

India's consumer inflation dipped to 6.71% in July, easing for the third month in a row, with the reading marginally below the 6.78% forecast by economists in a Reuters poll.

Meanwhile, Goldman Sachs analysts Danny Suwanapruti and Santanu Sengupta said they expect India to be included in global bond index, leading to passive inflows of around $30 billion.

If India is included into the GBI-EM Global Diversified, it could enter with a 10% weightage in the index, prompting around $30 billion of passive inflows, helping Asia's third largest economy finance its fiscal and current account deficits, Suwanapruti and Sengupta wrote in the report dated Aug. 16.

Talks over inclusion of India in the index had gathered steam in January, ahead of the federal annual budget, although issues regarding taxation poured cold water on the discussions.

Investors would have preferred being able to settle on securities settlement house Euroclear, even though it was not a hard criterion, the Goldman Sachs report said.

The sentiment was also lifted by the central government's upcoming sale of bonds for 330 billion rupees ($4.15 billion). The auction, on Friday, includes a new 10-year bond, which will replace the existing benchmark note. The bond is expected to draw strong investor demand and realign the entire yield curve.

($1 = 79.4650 Indian rupees)

(Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)

By Dharamraj Lalit Dhutia