In a bid to absorb the heavy liquidity build-up in the banking system, the Reserve Bank of India will resume issuing longer-term government securities next week under the market stabilisation scheme, along with the weekly auction of treasury bills, and limit transactions through the reverse repo window to Rs 3,000 crore (Rs 30 billion) -- Rs 2,000 crore (Rs 20 billion) in the morning and Rs 1,000 crore (Rs 10 billion) in the evening.

These measures are expected to drain longer-term liquidity and divert short-term liquidity to the inter-bank money market. The interest rates in the term money market, where banks borrow from each other for up to 15 days, have hovered close to 11 per cent for two weeks now. The average absorption through the daily reverse repo auctions this week was Rs 23,762 crore (Rs 237.62 billion).

Partha Mukherjee, head-treasury at UTI Bank, said "The cap on daily reverse repo will drive more money into the call and term money markets and cool down the rates there. This may effectively have a beneficial effect on (the soaring) deposit rates."

The RBI's purchases of $13.07 billion of foreign currency in the first three weeks of this month had infused over Rs 60,000 crore of rupee liquidity, which has flushed the banking system with about Rs 30,000 crore of excess liquidity.

The RBI has announced auctions of Rs 6,000 crore (Rs 60 billion) of government bonds maturing in 2009 on March 6 and Rs 2,500 crore (Rs 25 billion) of treasury bills on March 7, as part of the modified liquidity management measures.

The liquidity conditions in the second half of March are expected to tighten with the second stage 0.25-basis-point CRR hike that would suck out Rs 7,000 crore (Rs 70 billion) becoming effective tomorrow, Rs 7,000 crore of regular government bond auction and Rs 25,000-Rs 30,000 crore (Rs 250 to 300 billion) of outgo on account of advance tax payments.

Mohan Shenoi, group treasury head at Kotak Mahindra Bank, said the cap on absorption at reverse repo auctions is one way of compelling banks to park excess liquidity in longer term instruments.