The scheme does away with the current fixed rate repos (securities repurchase agreements), collateralised lending facilities and open market operations and replaces them with repos and reverse repos which bankers and primary dealers will bid for on a daily basis. This means banks and primary dealers will no longer have access to assured funding, based on balance-sheet sizes and performance. Both the RBI and the market hope the introduction of such funding at market-related rates will help develop a short-term interest rate corridor as well as a yield curve.

"The new mechanism will withdraw entity-wise limit on banks to access liquidity. This will help foreign and private sector banks who can bid for any amount now irrespective of their size to fund call money operations," said Nitin Jain, head of fixed income at ICICI-Securities and Finance Company. Traders said the mechanism will take some time to evolve and there might be procedural wrangles regarding the timing of the auctions which may need to be sorted out.

The central bank on Tuesday said under the scheme, repo auctions, for absorption of liquidity, and reverse repo auctions, for injection of liquidity, will be conducted daily, except on Saturdays. Interest rates will vary depending on the liquidity position.

"It will depend upon liquidity prevalent conditions. If supplies are heavy then interest rates will be low. But the central bank has assured us that the market will not starve for funds when supplies are tight," a dealer in a private sector bank said.

The central bank guidelines on the scheme said interest rates in respect of both repos and reverse repos will be decided through cut-off rates emerging from auctions on a "uniform price" basis.