JP Morgan says: "A significant portion of the augmented rupee liquidity has been sterilised with the Reserve Bank of India selling securities through open market operations. The only impact yet to be felt on domestic liquidity will be when the State Bank of India gives rupee deposits to the collecting banks."

According to the report, rupee deposits given to collecting banks could be large -- Rs 5,000 crore to Rs 6,000 crore. But given that most of this amount will be paid out of SBI's funds locked into Reserve Bank of India repos, there will be no increase in the availability of funds to the banking system. Advance taxes will squeeze out over Rs 5,000 crore over the next week, putting pressure on call money rates over the next fortnight.

"The situation could get worse if the RBI announces a central or state loan around thesame period," says JP Morgan.

The single and most important factor driving interest rates at the medium- and long-end will be demand for funds from the corporate sector.

"While industrial growth remains sluggish and credit growth is at its lowest levels, the situation can only improve from the current point. Such a situation will certainly see the RBI reduce cash reserve ratio (CRR) to augment availability of funds and to ease interest rates," JP Morgan says.

"Despite this, we expect a relatively high demand for funds and increased asset-creation by the real sector to put an upward pressure on interest rates in the second half of the year," the investment bank says. Though the RBI has completed three-fourths of the government's borrowings, sluggish economic growth and the consequent shortfall in excise and customs collections is bound to lead to fiscal slippages, JP Morgan says.

JP Morgan also says that the actual market borrowings of the central government could be as much as Rs 10,000 crore higherthan in the budgeted figures. While the RBI can partially absorb higher borrowings by providing WMA or subscribing to private placements, this would only help delay the rise in interest rates.

Advance tax outflows over the next week could lead to a squeeze in the availability of funds and call rates are expected to hit double digit levels. "With bank deposit growth for August 28 reflecting an increase of Rs 17,945 crore on account of RIBs, there will not be any more liquidity infusion," the investment bank says.

Interest rates, in general, are seen increasing over the rest of the financial year, but temporaray pockets of liquidity could be generated, which may result in yields softening for brief periods. It says that while short-term rates could fluctuate widely, long-term ones will be more flexible and the rise can only be gradual.