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The borrowing cost of states development loans (SDL), with maturity of 10-year, fell sharply by more than 15 basis points since last week following the steep fall in yields on benchmark government bonds.

According to the Reserve Bank of India (RBI) data, the 10-year weighted average borrowing cost for states was at 7.65 per cent on August 2, lower than 7.80 per cent in the previous week. Accordingly, the spread between the weighted average cut-off of 10-year SDLs and G-Sec narrowed to less than 40 basis points from more than 45 basis points earlier.

"Yield in our market has fallen from 7.37 per cent to 7.23 per cent and in last few days taking cues from the commentary of Fed with lesser hawkish tone and softening crude has allowed a lot of rally in US yields. Increasingly being lesser fear of inflation has pushed traders to take calls for investment and that has allowed yields to go down," said Ajay Manglunia, MD and Head Institutional Fixed Income at JM Financial.

Since last week, the yield on 10-year benchmark 6.54 per cent- 2032 bond yield has declined nearly 20 basis points due to fall in US Treasury yields and crude oil prices in the international market. It was fallen on expectations of moderation in pace of rate hike in India in the upcoming monetary policy.

Brent crude oil prices settled below the key psychological mark of $100 a barrel on Tuesday till the Indian market hours. Whereas, yield on US Treasury notes fell 7 basis points to 2.60 per cent on Monday.

In a poll by IANS, various Economist and fund managers expected the Reserve Bank of India's (RBI) rate-setting committee is likely to hike 25-50 basis points in repo rate in August monetary policy meeting.

Market participants expect yields on SDLs to remain range-bound in the coming days till policy meeting and movement will be seen after the guidance from the central bank.

"We expect the worst behind and yields likely to be stable now on than moving up further. As we see that rate hikes shall be limited going forward and all that has been factored in, we expect the band of 7.15-7.45 per cent for a few months now," Manglunia added.