India’s central bank will inject 360 billion rupees (US$4.95 billion) into financial markets this month by buying back government bonds as it tries to ease a liquidity crunch ahead of the festival season.

The bonds will be auctioned under open market operations during the second, third and fourth weeks of October, the Reserve Bank of India (RBI) said in a press release on Monday. Details will be revealed later.

Benchmark 10-year bond yields dropped by 12 basis points to 7.90%, their lowest level since late August, immediately following the announcement, but later made up some of this ground.

The RBI said it intervened following an assessment of “durable liquidity” needs and the amount of currency that it anticipated would be in circulation during a host of festivals in October and November, including Diwali (Deepawali) and Karwa Chauth.

Credit has tightened since a unit of the Infrastructure Leasing & Financial Services Ltd (IL&FS) group announced a week ago it was defaulting on about US$500 million of debt repayments due in the next six months; it was the third default by the company. The total liabilities are US$12.6 billion, with 61% owed to financial firms.

Cost overruns and contractural disputes have held up revenues from some of the signature infrastructure projects managed by IL&FS and its financial pain has deepened since the repayment defaults pushed up interest rates on short-term loans.

Worried about a contagion effect on lending confidence that could lead to further defaults, the government applied Monday to the National Company Law Tribunal for approval to replace the entire board of IL&FS with its own team. Some reports said India’s richest banker Uday Kotak, had been asked to serve on the board.

IL&FS put together a rescue package over the weekend that sought to raise as much as 150 billion rupees (US$2.1 billion) through a non-convertible debt sale, a higher borrowing limit and an increase in the firm’s share capital so it could arrange a rights offering, but the market reception was mostly negative.

The government’s intervention will help settle investor nerves after the RBI added to the growing pessimism Friday by disclosing it would borrow only 2.47 trillion rupees (US$34.08 billion) from money markets in October-March, which is below the budgeted estimates.

In September, the RBI conducted two open market operations, and  also allowed an additional withdrawal from the statutory liquidity ratio kitty kept by banks, which could be used to meet Liquidity Coverage Ratio requirements. This upset the markets and banks are now reluctant to lend to non-banking financial companies.