The central bank received 31 bids aggregating Rs 2,530 crore from banks and primary dealers (PDs). Call rates ended at 25-30 per cent.

"Demand for funds in the market rose substantially since players had to cover open positions on reporting Friday," a bond trader said. Banks and PDs square up their dealings ahead of the end of reporting period to avoid cash reserve ratio (CRR) liability.

Banks are required to maintain a minimum of 65 per cent of their CRR balances on their net demand and time liabilities (NDTL) under the lagged reserve system. Dealers said though call rates were ruling below 11 per cent for most of the day in the previous session, borrowers waited until the reporting day to enter the market.

"The central bank's action of rejecting all bids caught the market off the guard," a dealer said.

Other reasons cited for the flare up in call rates to 30 per cent was advance tax outflows, and primary dealers borrowing in call after the devolvement of a recent auction: the 11.92 per cent 2007.

Dealers said there was heavy selling of short-term bonds to tide over the liquidity crunch caused by the expected inflows from the auction not entering the system.

Bond prices in the short end declined by 20-25 paise. The 12.5 per cent 2004 bond ended at Rs 107 from the previous close of Rs 107.25.

According to market sources, the central bank's rejection came despite many players bidding at cut-off rates markedly higher than the ruling call rates.

"The RBI was trying to send a message that the liquidity adjustment facility (LAF) is not an assured facility," the head of trading with a financial institution said, adding: "Borrowers may not have fully covered their product requirement anticipating the call rates to rule steady on reporting day coupled with funds being made available through the LAF".

Dealers expect call rates to rule at 25-30 per cent levels on Saturday. "The rates may go up since LAF is not available during the weekends," a primary dealer said.