The floating rate bond (FRB) will be issued after a gap of three years while the previous index bond hit the market in the last quarter of 1997-98.

The floatation of the twin issues was discussed threadbare at a meeting that the Reserve Bank of India officials had with various players in the money market last week, a source said.

Both the securities might be of a short-term nature as the central bank intends to mop up all short-term liquidity available in the system. Around Rs 2,000 crore will be redeemed this fortnight on account of the 364-day T-bill while funds to the tune of Rs 11,000 crore are locked in repos.

"RBI wanted to gauge the reaction of the market players to both the instruments," a source said. According to analysts, the RBI might float these new instruments with a view to impart further depth to themoney market.

The first floating rate bond was floated in September 1995 and, subsequently, another one was floated on December 1995. The issues mopped up Rs 1,554.31 crore and Rs 2,000 crore, respectively.

The FRB was linked to the 364-day T-bill and the RBI pegged it at 300 basis points above the six-month average implicit yield of the 364-day T-Bill along with a floor rate of 13 per cent. Since the yields on the 364-day T-Bill have declined considerably, the coupon of security is now fixed at 13 per cent and has become, for all purposes, a fixed rate security.

"The RBI should peg the floating rate bond to benchmark other than the T-bill and structure the product more attractively," said SBI Capital Markets senior debt analyst Ashish Agarwal. The list of available benchmarks includes NSE Mibor, STCI and DFHI weighted average. Analysts point out that the bank rate could also emerge as an alternative benchmark.

Money market sources pointed out that although with rising inflation the capital index bondwas a good buy, the high carrying cost of the bond is likely to deter buyers.

The first capital index bond, issued on tap by the RBI, collected only Rs 704.52 crore and closed on January 28, 1998. "As the security carries a low interest rate but a high capital appreciation the cash flow of the bank might be affected which is why it tends to stay away," Agarwal said.