Both the state governments accepted 48 bids worth Rs 600 crore. The Andhra Pradesh loan received 97 bids for a sum of Rs 1,126.05 crore out of which it accepted 34 bids worth Rs 400 crore. The cut-off yield of the 10-year paper was pegged at 11.75 per cent.

Meanwhile, the loan floated by Tamil Nadu received 73 bids worth Rs 779.05 crore out of which it accepted 14 bids for Rs 200 crore. The cut-off yield of the paper was pegged at 11.72 per cent.

"The cut-off yield fixed by the RBI is in keeping with market expectations," money market sources said. The 11.99 per cent 2009 paper is currently quoting at 11.58 per cent in the secondarymarket.

The state-loan auction received an overwhelming response from the market owing to the sound financial health of both the state governments. "The entire amount was underwritten by primary dealers," said an official from a primary dealership.

According to money market sources, the issue was lapped up by institutions and provident funds as these entities have to maintain 15 per cent of their total investment in state loans. "Market participants are more interested to bid for state loans as the yield offered is higher than the existing secondary market yields," said a official from a primary dealership.

The loan auction will not have any adverse impact on the liquidity front as over Rs 1,000 crore is expected to come into the system on Friday through coupon payment on 11.78 per cent 2003 paper, 11.19 per cent 2005 paper and redemption of 364-day treasury bills.

Through the first tranche of the state loan auction held on April 22, both the states had mopped up over Rs 525 crore out of a totalissue of Rs 3,440 crore. Punjab was the first state to raise funds through a bond auction in January 1999.