The Reserve Bank of India (RBI) on Wednesday assured banks that it would take all steps, including conducting open market operations, to ensure sufficient liquidity in the system.
The central bank said in a statement liquidity tightening was reflected by the hardening of government bond yields.
It said the rising bond yields were due to "uncertainties around the government borrowing programme for the second half of 2013-14 as well as the prospective effects of banks' half-yearly account closure, the seasonal pick-up in credit demand, festival-related demand for currency and sluggish deposit growth."
"RBI is closely and continuously monitoring liquidity conditions and will take actions as appropriate, including open market operations, to ensure that adequate liquidity is available to support the flow of credit to productive sectors of the economy," it said.
Last week, the RBI raised the policy repo rate by 0.25 percentage points to 7.50% in a bid to ward off rising inflation, while rolling back part of the increase in the marginal standing facility, an overnight rate that had been increased in July as part of liquidity tightening measures to bolster the ailing rupee.