The Reserve Bank of India (RBI) said on Thursday it would resume selling securities under the market stabilisation scheme (MSS) from May 3, after a gap of nearly four months, to mop up excess liquidity from the banking system.

The RBI said it would increase the notified amount of 91-day t-bill auctions conducted every week by 15 billion rupees. The notified amounts of the two-weekly 182-day and 364-day t-bills have been increased by 10 billion rupees each.

Bond dealers said the move, which will see 25 billion rupees more being mopped up weekly, would knock prices down on Friday, with some expecting the benchmark 10-year bond yield to cross the psychologically key 7.50 percent mark in the first week of May.

"This step was long overdue as the system is awash with liquidity and it could lead to inflation expectations building up," said Rajat Kumar, head of fixed income at Standard Chartered Bank.

"At a time when, globally, rates are headed up and commodity prices are rising, this step is justified," he said.

The 10-year bond yield closed at 7.42 percent on Thursday. Kumar expects it to touch 7.55 percent by the end of next week after the market digests 100 billion rupees of fresh government bonds.

Liquidity has increased in the banking system due to fund flows into the record-breaking stock market, prompting intervention by the central bank to keep exports competitive.

Cash surpluses with banks, as reflected in the central bank's daily reverse repo auction, rose to 643.80 billion rupees as of Thursday, compared with 352.05 billion on April 17.

Until the middle of March, the central bank was pumping in money through the daily repo auction amid tight liquidity conditions caused by lower government spending, robust demand for bank credit and redemption of five-year India Millennium Deposits.

In January, inter-bank call rates touched a three-and-a-half-year high of 8 percent, forcing many banks to increase short-term deposit and lending rates.

( http://in.today.reuters.com)