However, unless a gilt issuance aimed at completing the government's borrowing programme materialises, it is not expected that the call money rates to harden beyond 9 per cent as inflows and unavailed refinance will provide some liquidity cushion.

According to the report, the money and currency markets weakened over the period on worries about the potential fallout of a possible payments crisis on domestic bourses. The defence scandal involving key political leaders of the ruling coalition which had broken out last week has also contributed to this situation.

The rupee, which traded at 46.53/$ at the start of the week, lost 17 paise to 46.70/$. Gilts also reflected this trend - the yield curve rose by around 15-20 basis points uniformly across the maturity spectrum.

However, the resignations of most of the accused leaders and the Prime Minister's address to the nation on last Friday had helped reduce the the apprehension about the government's fall.

The gilt prices moved upwards as a result and the yield curve ended the week only 12-15 basis points higher than the previous week. The government has reduced the rate of interest payable on relief bonds issued under 9 per cent relief bonds, 1999 scheme from 9 per cent per annum to 8.5 per cent per annum with effect from March 15, 2001. However, this reduction is not commensurate with the 100-150 basis points cut effected in other administered interest rates earlier.

The call money rates hardened slightly last week as banks started adjusting their reserve requirements ahead of the advance tax payments. The rates rose from, 7.10 per cent-7.25 per cent in the previous week to 7.50 per cent-7.75 per cent by mid-week. Though rates spiked to 8.75 per cent-9.00 per cent on Friday on a temporary mismatch in demand and supply of funds, they soon eased to 7.00 per cent-7.25 per cent onwards.

The average unavailed refinance last week was around Rs 2,500 crore while average repo subscriptions were Rs 3,000 crore. Further, the current week has coupon and redemption inflows totalling around Rs 2,000 crore. While it cannot be ruled out that the call rates touching the reverse-repo rate, any such movement is likely to stay for a short time only.

As tax outflows return to the money market through government spending, liquidity is likely to revert comfortable levels. However, any further loss in the government's political strength or any significant currency weakness because of either FII-outflows or as a result of global strength in the value of the US dollar, pose downside risks, according to the the weekly report.