By offering three-year paper at a market driven yield, the central bank is clearly giving a signal that the short-term interest rates are expected to move in line with the market, senior bankers said.

"The coupon of the three-year on tap bond is identical to that of the three-year security auctioned earlier this month, 32 per cent of which devolved on RBI," said an I-Sec official.

The tap-stock will be issued for a minimum amount of Rs 10,000 and interest willbe paid half yearly. The stock will be eligible for ready forward facility. Payment for stocks will include alongwith the nominal value of stocks applied for, accrued coupon from the date of commencement of tenure of the stock to the date of tendering application. Market sources feel that the centre's move to issue three-year government security follows the good response the paper received at the RBI sale window. The RBI sold the three-year paper above par at Rs 100.07. "Even in the secondary market the three-year paper is traded above par," said a dealer from a private bank.Earlier this month, the RBI had signalled a steep hike in the short-term and medium-term interest rates by hiking the coupon on three-year and five-year government stocks at the triple bond auction much above the secondary market yield.

At the auction -- held on July 1 -- despite the high coupon rates, the RBI had to take 32 per cent devolvement in the three-year paper and another 48 per cent on the five-year stock. However, the 12-yearpaper sailed through with no devolvement on the RBI.

The central bank had fixed the coupon of the three-year paper at 11.55 per cent up by 10 basis points compared to the secondary market, the five year at 11.75 per cent up by 65 basis points over the last auction on April 6. It has pegged the 12-year paper coupon at 12.25 per cent.