"In the last two weeks, primary dealers and commercial banks together have taken refinance to the tune of Rs 11,000 crore," said an official from Securities Trading Corporation of India (STCI).

The refinance rate is pegged at 8 per cent. The PDs can avail of additional refince facility at a premium of 2 per cent (10 per cent). In contrast, the overnight call rates closed at 10.50 per cent on Friday. Money market sources said under the existing tight money market conditions when the call rates are ruling 300-400 basis points above the RBI repo rate, PDs have no option but to knock at RBI's door for refinance. According to money market sources, fund outgo to the tune of Rs 5000crore through the priced-based twin-gilts auction early this week--coupled with another Rs 5000 crore worth of sale of securities by the central bank through its open market operations--has sucked out around Rs 10,000 crore from the system in one week. The Rs 3,250 crore infusion into the system last week through a 50 basis points cut in banks' cash reserve ratio (CRR) went almost unnoticed. "Whatever excess fund was available in the system has gone to the gilts market and most traders have taken long positions in short-term securities expecting prices to shoot up," said market dealers. On Friday, securities prices fell 5-10 paise across all maturities.

The prevailing high call rates has forced traditional lenders like LIC, UTI and SBI to move away from the overnight call money market to government securities market which saw a sudden spurt in gilts trading in the last two weeks. Primary dealers are allowed liquidity support to the tune of Rs 8,300 crore as against the previous level of Rs 6,000 crore. Theliquidity support is provided to them on the basis of their networth and bidding commitments.

In its April credit policy, the central bank has provided primary dealers (PDs) with two levels of refinance -- one at bank rate and the other at 2 per cent above the bank rate, which will offer a higher rate of refinance to PDs at a variable rate.

However, the central bank has done away with the discretionary liquidity support which was earlier available to PDs. According to market sources, the new refinance scheme offers a cushion to market players as they have the option to obtain refinance at a flexible rate. Under the refinance scheme, liquidity support against collateral of government securities will be based on bidding commitment and other parameters. However, each drawal will be subject to the restriction of repayment which will be within 90 days.