India's central bank rejected some bids at a sale of shorter-dated government bonds amid growing concerns over stronger steps to remove excess banking liquidity. The Reserve Bank of India accepted bids worth 45.06 billion rupees ($471 million) against an auction size of 110 billion rupees for the 6.20% 2029 bond, setting the cutoff yield at 6.4031% versus the estimated 6.47%. The RBI sold the full planned amounts of the 6.57% 2033 and new 2056 bonds. The five-year yield rose six basis points to 6.59%.

The sharply lower cutoff yield reflects market fears that the RBI may take harsher measures to drain surplus cash. Shorter bonds have been the primary beneficiary of excess liquidity, with banks parking most surplus funds in such instruments. Governor Sanjay Malhotra told CNBC-TV18 the RBI will use all available tools, including Open Market Operations and swaps, to withdraw surplus liquidity, adding "nothing is off the table."

Bets against short-term bonds are rising, with overnight short positions in the five-year benchmark pushing daily borrowing above 100 billion rupees this month, roughly double early August levels, according to Clearing Corp. of India data. Gopal Tripathi, head of treasury at Jana Small Finance Bank Ltd., said the RBI is unwilling to accept higher yields given ample liquidity, suggesting asymmetric pricing at the shorter end may have driven the decision.