The Indian government saw little success in a second attempt to infuse liquidity in the banking system through a bond buyback as securities offered at the auction were earlier bought by banks at much higher levels, market participants said on Thursday.

The central bank, acting on behalf of the government, accepted bids to buy back only 20.7 billion rupees ($247.96 million), a fraction of the 600 billion rupees in bonds that were offered.

"Most banks are out of money on these bonds. Why will anyone want to sell these bonds at a loss," a senior treasury official at a large state-run bank said.

"They can easily hold these bonds till maturity and get the face value at least," the person added.

In a previous auction on May 9, the central bank accepted bids to buy back government bonds worth 105.1 bln rupees versus the notified amount of 400 billion rupees.

"Overall participation in these securities is less as holding is at higher costs," said VRC Reddy, treasury head at Karur Vysya Bank.

The central bank can choose to accept the higher prices being demanded by the banks if it was looking at purely infusing cash into the banking system but that would also push down yields for these papers by a large margin.

"They would not want to accept higher prices being demanded and do a 25 basis points rate cut without actually cutting rates," the senior treasury official added.

It is a strong signal from the Reserve Bank of India that they are clearly not comfortable with yields front-running the monetary policy action and hence have rejected most of the bids, a dealer with a private bank said.

The RBI got offers for 405.95 billion rupees worth of bonds at the auction.

($1 = 83.4823 Indian rupees)

(Reporting by Bhakti Tambe, Dharamraj Dhutia and Siddhi Nayak; Editing by Eileen Soreng)