The bond market heaved a sigh of relief on Friday and prices of government securities stabilised after dropping sharply in the early trade, following an apparent change in the Reserve Bank's position on liquidity management.

The Reserve Bank of India Governor Bimal Jalan on Friday told reporters in Delhi that the extra government borrowings announced on Thursday were in anticipation of (the government) requirements and were not a liquidity-mopping exercise.

This is in contrast to what the RBI Deputy Governor Rakesh Mohan said on Thursday in Mumbai. Outlining the central bank's liquidity management plan, Mohan said: "We are watching liquidity on a daily basis and apart from hiking the notified amount of treasury bills, open market operations and extra government borrowings in the calendar will also be considered."

After market hours, the central bank on Thursday announced Rs 21,000 crore (Rs 210 billion) worth of bond auctions in the first three weeks of July, against the original schedule of raising Rs 14,000 crore (Rs 140 billion).

The RBI will auction Rs 12,000 crore (Rs 120 billion) through three long-dated papers on July 1 against the original schedule of Rs 9,000 crore (Rs 90 billion), and another Rs 9,000 crore (Rs 90 billion) between July 14 and 21 against the original plan of Rs 5,000 crore (Rs 50 billion).

Yields on government bonds eased from morning highs after Jalan reiterated that the RBI's stance on the repo rate was soft even though he ruled out an immediate cut.

The benchmark 9.81 per cent 10-year paper closed at 5.72 per cent, virtually unchanged from Thursday, after shooting up to 5.76 per cent.

The US Federal Reserve cut the Fed funds rate on Wednesday by a quarter percentage point to a 45-year-low of 1 per cent but the Indian central bank is still watching the progress of the monsoon and inflation rates before taking any decision on cutting the repo rate, currently at 5 per cent.

Referring to the increased government borrowing, Jalan said, "It is in anticipation that that much is required." When asked if the extra borrowing was intended to suck out liquidity, he said, "It is not for that specific exercise." According to him, "market conditions are good, so if the government needs more money, it can be raised."

On Thursday Mohan said: "The Fed rate cut has made no difference in monetary policy in India. The macro-economic conditions do not warrant a repo rate cut for some time."