The one-day cash rate ended at 8.40/8.50 percent, lower from Friday's close of 9.50/9.55 percent for three-day loans, after briefly rising as much as 9.85 percent in early trades.
Most banks borrow on Fridays for three days to cover weekend reserve requirements due to the sharp drop in volumes seen on Saturdays.
"There seems to be some improvement in liquidity and since it is the latter half of the reporting fortnight, demand should be on the slightly lower side," said a dealer with a large private-sector bank.
Demand typically wanes in the second week of the reporting period as most banks prefer to meet the bulk of their mandated reserve needs early on, to reduce exposure to any volatility in rates in the second week.
"I would not be surprised if call rate moves to below 9 percent in next couple of sessions," the trader said, indicating further easing in demand and improvement in cash condition due to month-end government spending on salaries and subsidies .
Banks have faced tight cash conditions following heavy outflows toward advance tax payments by companies this month, which pushed up the call rate close to 10 percent and repo borrowing from the central bank to record levels last week.
The Reserve Bank of India's marginal standing facility at 100 basis points above repo rate of 8.5 percent too was tapped by banks for four straight days last week to tide over tight cash conditions.
Banks borrowed 1.429 trillion rupees ($27.06 billion) from the central bank's repo under the liquidity adjustment facility on Monday, lower from 1.733 trillion on Friday which was the highest in more than two years, Thomson Reuters data showed.
Call market volume was at 202.99 billion rupees, lower than 207.09 billion rupees on Friday, Clearing Corp of India data showed.
In the collateralised borrowing and lending obligation (CBLO) market, the volume was 350.68 billion rupees against a total of 251.72 billion rupees in the previous session.
The weighted average rate in the call money market was at 9.50 percent, lower from 9.82 percent on Friday. In the CBLO market, the average rate fell to 7.12 percent from 9.11 percent.
In the inter-bank repo market, volumes were at 79.65 billion rupees, compared with a total of 62.23 billion on Friday. The weighted average rate was at 8.99 percent from 9.19 percent.