The RBI cut the coupon in the face of aggressive bidding by banks against the backdrop of a comfortable liquidity position. At the auction, the RBI received a whopping 153 bids for Rs 6,368 crore -- over four times the notified amount of Rs 1,500 crore. The RBI alloted only nine bids and out of these, three were partial. The weighted average of the security was 11.45 per cent. In the kerb market, dealers said there were buy bids at Rs 100.05 and sale bids at Rs 100.10.

The lower coupon on the three-year paper promptly triggered a rally in the price of the 11.55 per cent gilt maturing in 2001 and the 11.40 per cent gilt maturing in 2001. The price rose by 8 paise and 5 paise, repectively, in post auction trading forboth securities.

"The new coupon is not reflective of any interest rate movement," Sandip Deb, debt analyst at ICICI-Securities, said. Dealers said that the new coupon is more aligned to maket rates although they were sceptical about the rally that is taking place in the short-term secondary markets.

"The prices are not sustainable. Prices will crash as liquidity flow in December is not as good as it was in November. Advance tax outflows will sap any excess liquidity which will see interest rates tighten," Deb said.

I-Sec, in its weekly outlook on the money makets, had said that the end of this fortnight might see a tightening of interest rates.

With Monday's auction, the government has completed Rs 80,452 crore through gross market borrowing out of a budgeted borrowing programme of Rs 79,376 crore. Dealers said they are expecting another auction very soon.