The state loan carries a coupon of 12.25 per cent, 26 basis points higher than a similar maturity central-governmnet paper floated earlier this week. This is the fourth of a series of sale of Government papers announced in a single week-- the first three being central-Government issues.

Riding high on the liquidity wave, the RBI set the coupon on the seven-year gilt, auctioned on Friday, at 11.68 per cent to mop up Rs 3,000 crore. This was well below the market expectation of 11.70 per cent and effectively means that banks were bullish about medium-term interest rates heading southwards.

Those banks which were not alloted this security, bid even at 11.62 per cent for the paper in the secondary market after the results of the auction were announced. The auction drew yetanother phenomenal response from banks as the RBI received 222 bids for Rs 8,987 crore. The central bank accepted 16 bids.

The Reserve Bank also cut the yield of 91-day and 14-day treasury bills by 52 basis points and 21 basis points at the auction held on Friday. The RBI had cut the yield of the 364 day T-bill to 10 per cent on Wednesday.

Money-market dealers said that redemption of the three-day repo will bring in Rs 6,500 crore on Saturday and with Rs 3,000 crore going into the seven-year paper, Rs 3,500 crore will be still left in the system.

"There is enough liquidity and the bullishness will continue for the the medium and long-term securities," debt analyst at ICICI Securities Sandip Deb said.

The announcement of the 12.25 per cent ten-year state loan failed to dampen the bullishness in the market. "I guess whenever there is excess of Rs 3,000 crore floating in the system, there will be a fresh round of Government borrowing," a dealer with a primary dealership said.

With the success of theseven-year paper auction, the Government has mopped up Rs 9,500 crore in a single week through three papers-- a ten-year paper pegged at 11.99 per cent, a re-issued 14-year stock at 12.40 per cent and the seven-year paper at 11.68 per cent. Besides, the 364-day treasury bill mopped up another Rs 500 crore.

The Reserve Bank has a daunting task of raising Rs 84,000 crore for the Government in fiscal 2000 and it is likely to raise a major portion of the amount through longer dated securities.