Dec. 11 (Bloomberg) -- India's 10-year bond yield held near the highest in a week on concern corporate tax payments that are due at the end of this week will reduce surplus cash with banks, sapping demand for government debt.

Yields, which move inversely to prices, on 10-year notes today rose to the highest this month as firms prepared to pay the third installment of advance taxes for the fiscal year ending March 31. That may drain as much as 250 billion rupees ($6.4 billion) from the banking system, according to Sanjay Arya, treasurer at state-owned Bank of Maharashtra Ltd.

``The tax outflow will have a prolonged bearing on the undertone at a time when there aren't much surpluses with banks,'' Mumbai-based Arya said. ``I expect yields to rise in the near term.''

The yield on the 7.99 percent note due July 2017 held at 7.88 percent at the 5:30 p.m. close in Mumbai, according to the central bank's trading system. The price was 100.71 rupees.

The 10-year yield may rise to 7.95 percent in the next few days, Arya said.

Higher interest rates in the money market and a decline in daily lending to the central bank suggest that the surplus cash at banks has decreased. The rate on overnight loans rose to as high as 7.55 percent, the highest in almost a week, according to data compiled by Bloomberg.

Bonds fell on speculation some investors will sell securities to accommodate a fresh supply of debt from an auction scheduled for later this week.

The government on Dec. 14 plans to sell 50 billion rupees of the benchmark 2017 debt and 20 billion rupees of securities maturing in 2036 as part of its annual borrowing program.

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

Last Updated: December 11, 2007 07:56 EST