Under the proposals, overnight IOUs that the Reserve Bank of India buys from banks or issues to them -- repos and reverse repos -- would be extended to a one-week maturity, giving them a stronger effect on the money market.

A committee of central bankers also suggested that a new Market Stabilisation Fund would issue debt to complement the government bonds that the Reserve Bank is running out of as it tries to soak up cash from the country's banking system.

Foreigners have been pouring money into India, attracted by its booming stockmarkets and powerful economic growth.

Exchanged into rupees, their investments would leave Indian banks awash with extra cash, pushing interest rates down and inflation up, unless the central bank soaked up that excess money by selling government bonds that it holds.

The deluge of foreign investment has challenged the Reserve Bank's ability to do that; it now has few government bonds left to sell.

"Since the early 1990s, the conduct of monetary policy came under stress with increasing interplay of market forces in the determination of interest rates and exchange rate as a consequence of deregulation," the central bank said in a release.