Indian state-run banks are likely to turn more cautious in their government bond purchases amid rising yields, but will continue to increase their exposure at a more gradual pace, treasury officials said.

"There was space in trading portfolios of state-run banks as they had booked huge profits for two months and with change in yield direction, there is replacement happening," a treasury head of a state-run bank said told Reuters.

These banks net bought bonds worth nearly 285 billion rupees ($3.47 billion) in the 18 trading sessions from June 8 to July 4, data from Clearing Corp of India showed. They had net sold bonds worth 575 billion rupees from March to May.

Bond yields started rising after the Reserve Bank of India's (RBI) June monetary policy decision pushed out hopes of a rate cut to February, with many participants expecting one only next financial year.

Since that decision, the benchmark 7.26% 2033 bond yield has jumped 14 basis points to 7.12%, including more than 10 bps in the last 10 sessions.

"The speed at which yields have risen recently has made traders cautious and state-run banks will be on buying side but not show enthusiasm to protect any particular level as they would want to enter at higher yields," said Vijay Sharma, senior executive vice president at PNB Gilts.

Most market participants expect bond yields to rise further. The Federal Reserve's policy decision in late July and the RBI's in August could trigger volatility and provide attractive entry points.

There are high chances of the yield inching towards 7.20%. So, we may keep on entering at every upward move, a senior treasury official at another state-run lender said.

The official as well as two others requested anonymity as they are not authorised to speak to media.

Traders said most activity, apart from the benchmark, was in the liquid five-, seven- and 14-year papers.

"Even five- and seven-year papers are very attractive around 7.10% and we have decided to go long," a treasury head of another state-run lender said.

"Inflation projections hint a downward trajectory, and in the medium term, decent treasury profits can be booked." ($1 = 82.0670 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Varun H K)