At a meeting with bankers held at the RBI central office on Monday, the central bank officials told banks to bid at the auction with an eye on the "on tap" rates of the six- and 10-year papers. The central bank fixed the six-year paper's coupon at 11.75 per cent while the 10-year paper's coupon was pegged at 12.10 per cent.

The meeting - a customary one that precedes every auction - was attended by senior bankers and representatives of six primary dealers. Bankers who attended the meeting said the RBI is desperate to see the Rs 5,500-crore issue through and is not averse to doling out a higher coupon rate. "There could be devolvement on the RBI if it does not offer a market-related yield on the five-year paper," debt analystat ICICI Securities (I-Sec) MR Madhavan said. I-Sec is a prominent primary dealer in government securities.

Money market dealers said that the three-year paper, which is expected to raise Rs 2,500 crore, will sail through as "it is a darling in the market". Treasury chiefs expect the coupon of the three-year paper to be fixed at 11.45-50 per cent.

The RBI officials indicated that banks are free to bid for the three-year paper as per "market aspirations". Currently, the three-year paper is being traded in the secondary market at 11.45 per cent. Analysts said that the RBI will not be averse to peg the coupon rate at 11.50 per cent. The five-year paper, which is being auctioned for Rs 2,000 crore, however, proves a stumbling block. The RBI has already given an indication through the "on tap" issue of the six-year paper that the interest rates in the primary market are moving northwards. The six-year paper saw a cut-off rate of 11.75 per cent - up from 11.50 per cent in the previous auction held on May8.

Analysts said that the five-year paper is likely to see a coupon rate of 11.65-70 per cent - up by 55-60 basis points over the previous auction held on April 1. "The RBI is concerned about devolvement. It has clearly hinted that it will try out every possible way to see the government borrowing through. This includes a cash reserve ratio cut," a senior banker said. The Rs 1,000-crore 12-year paper will be lapped up by the provident funds, insurance companies and large nationalised banks. This paper is likely to see a coupon of 12.20 per cent, analysts said.The government seems to have factored the response to the fixed-rate repo while announcing the auction of three new stocks. The RBI mopped up Rs 5,567 crore in the last two days of the last week through the repo window. The amount came back into the system on Monday and RBI mopped up another Rs 4,000 crore today leading to a Rs 1,500 crore net infusion into the system.

The July 1 auction will complete Rs 40,531 crore worth of the centre's borrowingin the current fiscal out of a net borrowing programme of Rs 48,000 crore. The gross borrowing programme is pegged at Rs 79,000 crore. This means that the government has seen 51 per cent of its gross borrowing plans. The RBI has taken Rs 14,000 crore in its books on account of devolvement.