MUMBAI - India will reduce the supply of Treasury bills by about 600 billion rupees ($7.20 billion) for the next six weeks till the end of June, the Reserve Bank of India (RBI) said on Friday, which could result in a fall in bond yields.

The government will sell 40 billion rupees of 91-day, 182-day and 364-day T-bills every week, down from 100 billion rupees, 50 billion rupees and 70 billion rupees, per its earlier schedule.

The move comes after the government's two earlier bond buyback auctions saw a tepid response from market participants.

Earlier today, Reuters reported that most bond traders were expecting a cut in the government's short-term borrowing to better regulate liquidity in the banking system, and reduce a deficit that has persisted for four weeks now.

A cash deficit in the banking system has risen as the government slowed spending due to an ongoing national election.

"This is a sound decision given that the bond buybacks were getting poor response. Market will take this positively. It will help boost liquidity while at the same time reduce borrowing cost for the government," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.

We can see a decline of around two-three basis points on the benchmark bond yield in the next trading session, Pawar added.

The direct reduction in T-bill supply would be important as it signals that the government's liquidity remains very comfortable from an immediate near-term horizon, said Siddharth Kothari, economist at Sunidhi Securities & Finance.

"The cost of short term liquidity for (the) government had gone very high and it had been issuing T-bills with a weighted average yield of over 7% for (the) last three auctions." ($1 = 83.3534 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Sohini Goswami and Shinjini Ganguli)