MUMBAI - India's benchmark 10-year bond yield dropped to its lowest level in 10 days on Thursday after robust demand at a special auction of government securities, with traders suspecting the central bank was also directly buying bonds in the open market.

The benchmark 10-year bond yield closed down 4 basis points on the day at 5.96%, after falling to 5.94% -- its lowest since Feb. 1.

The government sold 260 billion rupees ($3.57 billion) worth of 2025 and 2030 benchmark bonds, having exercised the greenshoe option to retain an additional 40 billion rupees worth of paper, at rates lower than market expectations. 

The same papers had gone unsold at the auction last Friday after the RBI had rejected all bids on account of traders having quoted high yields.

"There has been strong buying seen in the benchmark bond. We can only guess who the buyer is but clearly the RBI is the best bet considering they have pledged to support the market," the head of fixed income at a private bank said.

The RBI reiterated in a policy statement last week that it will maintain ample liquidity in the banking system and ensure the government's massive borrowing programme is conducted in an orderly and smooth manner. 

The central bank has bought bonds worth 1.2 trillion rupees via open market auctions and secondary market purchases so far this year. It has also conducted simultaneous buying/selling of bonds worth 1.4 billion rupees where it sold short-end paper and bought long-end bonds.

Market participants are hopeful of the RBI announcing yet another OMO purchase for next week and said the cut-offs at Friday's 260 billion rupees sale will be aggressive if RBI support is provided.

With the government scheduled to sell 12.06 trillion rupees of bonds next year, RBI will have to play a key role in keeping yields anchored, traders said.

($1 = 72.8350 Indian rupees)

(Reporting by Swati Bhat; Editing by Kim Coghill) ((swati.bhat@thomsonreuters.com; twitter.com/swatibhat22; +91-22-68414381; Reuters Messaging: swati.bhat.thomsonreuters.com@reuters.net))