The source said the central government might not raise all the funds through bonds as it had surplus cash, as reflected in the fact that it had not used a short-term loan facility offered by the central bank for five straight weeks to January 17.

"There are a variety of ways through which the funds could be raised, and a private placement of bonds are an option," said the source, who declined to be identified.

"Moreover, the government may have adequate balances and may not have to raise the full amount from the market. It has a cushion of Rs 60 billion through the ways and means advances (the short-term loan facility)."

India said on Monday evening it would prepay loans totalling $2.8 billion taken from the Asian Development Bank and the World Bank out of RBI's forex reserves by the end of March, and repay the central bank in rupees borrowed locally.

The RBI is sitting on record foreign exchange reserves of $72.4 billion, boosted by its persistent buying of dollars from the foreign exchange market.

A government official told Reuters that India would tap the domestic market by the middle of February to raise Rs 130 billion.

Some traders had speculated that the government could raise this money by privately placing bonds with the central bank as the debt market was already weighed down by concerns of a US strike on Iraq.