RBI has reduced statutory liquidity ratio (SLR), the share of banks' incremental investments which must be compulsorly invested in government paper, by 0.5% from 25%, on Wednesday night. The move comes after surplus funds with banks collapsed from a high of nearly Rs 50,000 crore per day to about Rs 4,000 crore on Tuesday.

The RBI measure will give headroom to banks to offer additional credit to telecom companies, which need the sum to pay for 3G spectrum and for payment of advance tax by corporates next week. RBI has also opened an additional window to the banks to borrow funds up to July 2.

Earlier in the day, RBI deputy governor KC Chakrabarty said the central bank will ensure adequate liquidity in the banking system amid concerns that cash could be tight in the coming week due to payments for 3G spectrum.

Short-term interest rates have been rising on concerns that these payments, due by May 31, could create a temporary liquidity crunch.

The 3G spectrum auction that ended last week will earn the government Rs 67,700 crore ($14.3 billion), nearly double than what it had expected.