The Indian rupee posted its biggest single-day gain in 21 months on Tuesday, while bond yields fell to their lowest in more than two weeks following the central bank`s new measures to stabilise markets and its comments on the currency.

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The Reserve Bank of India said on Monday it will simultaneously purchase and sell government bonds through two more tranches of open market operations in its `Operation Twist` and ease held-to-maturity limits for bond holdings by banks.

It also said the recent appreciation of the rupee is working towards containing imported inflationary pressures, prompting traders to believe the central bank will not be as aggressive in its dollar purchases as in recent months.

The partially convertible rupee ended the session at 72.8625/8725 per dollar compared with 73.61 at the previous close. It rose to a high of 72.76, its strongest since March 3. Its 1% gain on the day is its best since Dec. 18, 2018.

Despite the RBI statement on the rupee, DBS economists said intervention in the forex market is unlikely to be completely off the table.

"We expect reserve accumulation to be a priority for the policymakers, especially if strong flows destabilise FX markets, when inflationary pressures subside," they wrote in a note.

The benchmark 10-year bond yield dropped as much 20 basis points (bps) in early trade following the measures and closed down 18 bps at 5.94%.

"Consistent operation twists and relaxation to the HTM limit should help in flattening the yield curve," said Upasna Bhardwaj, economist at Kotak Mahindra Bank.

"However, the toolbox seems to be shrinking meaningfully. We expect the 10-year to range between 5.8-6.1% given the RBI measures," she said.

Traders said a larger-than-expected contraction in gross domestic product reported on Monday also aided sentiment for bonds as it revived hopes of more interest rate cuts by the RBI over the next few months.

India`s economy shrank 23.9% in April-June, much more than forecast, pointing to a longer than previously expected recovery, with analysts calling for further stimulus.