* New 10-yr bond yield jumps as much as 11 bps
* RBI announces 100 bln rupees open market bond sale
* Timing surprises markets, sales had been seen in Aug
* Bond sale seen tied to upcoming bond redemptions (Updates to add trader quotes, details)
MUMBAI, July 3 (Reuters) - Indian government bonds yields rose sharply on Monday after the central bank announced an open market sale of debt to mop up excess liquidity that filled the country’s banking sector following last year’s demonetisation push.
The announcement from the Reserve Bank of India late on Friday on a 100 billion rupees ($1.55 billion) sale of government bonds surprised traders, who had expected it to happen in August near the time when the central bank must pay a hefty dividend to the government.
The RBI has so far resorted to selling short-end securities through a special scheme to drain some of the excess cash, a method that was seen as less disruptive than removing liquidity through regular OMOs.
Traders said the open market sale appeared intended to help offset bond redemptions of 526.20 billion rupees due July 9, with another 303 billion rupees in August, which would have added liquidity to the financial system.
“It looks like they are timing it with bond redemptions,” said one senior dealer at a foreign bank, noting the overall impact of the open market bond operation would likely end up being broadly neutral on liquidity
The new 10-year bond yield jumped as much as 11 basis points to 6.62 percent in early trade, its highest level since June 7, from its close of 6.51 percent. It was trading at 6.59 percent at 0600 GMT.
The five-year benchmark overnight indexed swap was at 6.34 percent compared with its previous close of 6.28 percent.
Indian banks were flushed with deposits after the government abolished high-value currency notes late last year in a push to unearth billions of dollars of so-called black money, forcing people to deposit their unused notes with banks.
The fall in bonds comes after a recent rally as lower-than-expected inflation data had raised hopes for a rate cut as early as the RBI’s policy review on Aug. 2.
Traders expect the central bank to conduct at least two to three more OMO sales in the July-September period given surplus liquidity of around 3 trillion rupees in the banking system, much above the RBI’s traditional tolerance level of 1 trillion rupees. ($1 = 64.6750 Indian rupees) (Reporting by Suvashree Dey Choudhury; Editing by Rafael Nam and Sam Holmes)