"The coupon has been set at 10.80 percent, payable half-yearly," Birendra Kumar, managing director of SBI Capital Markets, which is arranging the issue, told Reuters. SBI is privately placing 63-month tier-II bonds for Rs 1000 crore on March 23.

Tier-II bonds are issued by banks, usually at the financial year-end, to boost their capital adequacy . The Reserve Bank of India (RBI) rules mandate banks in the country to have a minimum capital adequacy ratio of nine percent of risk-weighted assets at the end of March 2000. SBI officials said the bond issue was part of its strategy to keep its capital adequacy ratio above 12 percent at any point of time.

Its capital adequacy ratio stood at 12.51 percent at the end of September 1999. Analysts said although SBI's bonds ranked among the best priced by any Indian bank for bonds of a similar tenor, the issue was hitting the market at a time when liquidity was expected to tighten.

Three state run banks - Central Bank of India, State Bank of Travancore and State Bank of Mysore - have similar maturity issues open in the market, all offering an annualised coupon rate of 11.35 percent.

Nearly Rs 7000 crore worth of corporate advance tax payments are expected to leave the banking system to the government starting Tuesday and another Rs 1900 crore the next day towards a sale of state government loans. Secondary market yields on corporate debt have risen in the first half of March, after the budget for 2000/2001 presented on February 29 did not trigger a widely expected cut in interest rates.