The one-day call rate ended at 8.50/8.55 percent, down from Tuesday's close of 8.80/8.85 percent.
"It is possible that banks feared a strain on liquidity after the Reserve Bank of India did not announce debt purchase via open market operations and hence covered needs through the repo route," said a dealer with a large state-run bank.
Banks borrowed 1.41 trillion rupees ($28.50 billion) from the RBI's repo window under the liquidity adjustment facility on Wednesday, up from 1.30 trillion rupees on Tuesday.
Banks' requirement for funds is typically strong in the first week of the reporting cycle as most prefer to cover mandated reserve needs early to reduce exposure to likely volatility later.
Traders said cash rates could inch towards the double-digit mark next month after companies pay advance taxes around mid-March, pulling out cash from banks.
But expectations that the RBI will cut the cash reserve ratio further and continue with debt purchases via OMOs will keep call rates under control, traders said.
The RBI will buy up to 120 billion rupees ($2.44 billion) of government bonds through open market operations on Feb. 24.
RBI Deputy Governor Subir Gokarn said on Tuesday the central bank will consider lowering the cash reserve ratio going ahead, and the option to conduct more OMOs was also on the table.
In late January, the RBI had cut the CRR, or the share of deposits banks must hold with the RBI, by 50 basis points, which is estimated to have released about 320 billion rupees into the banking system.
The volume in the call money market was 130.94 billion rupees, against a total of 143.47 billion rupees traded on Tuesday, data from the Clearing Corp of India showed.
In the collateralised borrowing and lending obligation (CBLO) market, the volume was 456.15 billion rupees, compared with Tuesday's total volume of 438.22 billion rupees.
The weighted average rate in the call money market was at 8.79 percent, down from previous close of 8.82 percent.
In the CBLO market, the weighted average rate was 8.47 percent, up from 8.45 percent previously.
In the inter-bank repo market, volume was 121.74 billion rupees, compared with 101.58 billion rupees in the previous session.