The finance ministry and the Reserve Bank are putting in place a process for enabling buyback of government securities worth over Rs 84,000 crore (Rs 840 billion) this month.
"The finance ministry and the RBI are setting up a process for the gilt buyback," RBI Governor Bimal Jalan said on Friday.
He said the scheme, which would enable government to buy back high-cost illiquid debts from banks and insurance companies, would start this month.
Finance Minister Jaswant Singh had announced the government's intention to buyback securities in a bid to reduce its interest outgo.
According to the plan, the government would provide low-cost debts for the principal amount of the high-cost debts worth over Rs 84,000 crore.
The premium would be paid in cash.
The gilt buyback, which was slated for last month, could not take place as the software system was not ready.
The government plans to buyback the securities through an online screen-based bidding process.
The finance minister also announced a debt swap scheme for states and prepayment of foreign loans to reduce the interest outgo.
The move assumes importance in the wake of the Centre's burgeoning interest burden estimated at Rs 1,23,223 crore (Rs 1,232.23 billion) this fiscal.
Interest payments amounted to Rs 14,198 crore (Rs 141.98 billion) in April-May, which formed a major portion of the Centre's non-plan expenditures at Rs 37,042 crore (Rs 37.042 billion) in the two months.
The government expects its non-plan spending to be Rs 3,17,821 crore (Rs 3,178.21 billion) for the entire fiscal.