The central bank, however, maintained the cut-off rate of the 14-day T-bill at 8.10 per cent and in the process ended up taking the devolvement of the entire amount of Rs 500 crore.

With the hike in the 91-day T-bill cut-off rate, the RBI has attempted to set right the yield curve for securities in the short term, which had become skewed when the 14-day T-bill yield was higher than the 91-day T-bill.

Currently, the repo rate is pegged at 8 per cent, the 14-day T-bill at 8.10 per cent, the 91-day T-bill at 9.02 per cent and the 364-day T-bill at 9.6 per cent.

The RBI had hiked the yield on the 364-day T-bill by 56 basis points to 9.60 per cent from 9.04 per cent on Wednesday andin line with the coupon on the recently concluded six-year paper auction, the central bank fixed the yield for the paper at 11.98 per cent against the market expectation of 11.95 per cent.

The market is not willing to accept short-dated securities at the existing secondary market levels as it expects interest rates to go up in the second half of September, sources said. Currently the 91-day T-bill maturing in October is trading at 9.12 per cent in the secondary market.

At the auction of the Rs 500 crore 91-day T-bill on Friday, the RBI received nine competitive bids worth Rs 215 crore and one non-competitive bid worth Rs 30 crore. The RBI pegged a cut-off price of 97.80 while accepting all the competitive bids for Rs 215 crore. The RBI allotted the sole non-competitive bid of Rs 30 crore.

At the auction of the 14-day T-bill, the RBI received no bids and maintained the cut-off price at Rs 99.69.

Money markets analysts expect the prices of short-dated papers to fall by another 5-10 paise next week.

Inthe last week of August, the central bank had hiked the yields on both the 14- and 91-day T-bills to 8.10 per cent and 8.01 per cent respectively, after the central bank hiked the repo rate by 300 basis points and raised the cash reserve ratio by 100 basis points. The central bank unleashed the tight money measures after the rupee touched a record low of 43.70.

INSIGHT -- Short-term rates on the rise

Short-term interest rates have seen a steep rise after the Reserve Bank of India's intervention to prop up the currency. Even before the intervention, short-term rates had been on the rise, as shown by the increase in the cut-off rate from 5.99 per cent to 6.78 per cent on August 14. On August 21, a day after the repo rate hike to 8 per cent, the 91-day T-bill rate increased to 8 per cent. This anomaly did not escape the market, and the auctions held on August 21 and 28 devolved completely on the RBI. The RBI's open market operations will ensure that money market rates will continue to remainhigh.