Interbank liquidity tightened sharply in November with banks seeing large amount of deposit withdrawals by the public for festival spending. That has created a shortage of funds as this cash typically comes back to banks after a lag of few months.

Tight liquidity was one of the factors to push up the benchmark 10-year bond yield 15 basis points in November.

Rajan was speaking to analysts at a teleconference after announcing the monetary policy statement, where he kept the policy rate unchanged at 6.75 percent.

On India's growth prospects, RBI Deputy Governor Urjit Patel said the economy was on a recovery path and is expected to pick up pace going ahead.

Read More: RBI, government steps to help banks end NPA woes by March 2017: Rajan

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