The move follows the government of India permission to allow 35 non-banking entities to undertake ready forward transactions in notified government securities. The non-banking firms included primary dealers, dedicated gilt funds, mutual funds, insurance companies and some financial institutions.

Financial institutions are traditional lenders in the inter-bank call money markets. "Now that the traditional lenders will be missing there is a good chance that the call rates might go up," an official in a primary dealer said. Non-bank institutions, especially the FIs, lend on a average of Rs 5,000 crore in the call money market in a fortnight.

For the fortnight ended April 23, the non-bank institutionslent Rs 3,949 crore while banks lent Rs 9,659 crore and borrowed Rs 11,612 crore during the same period. During the same period, the pirmary dealers lent Rs 1,677 crore and borrowed Rs 4,802 crore.

The decision to permit India's largest mutual fund the Unit Trust of India, the Life Insurance Corporation of India and other non-banking firms to undertake ready forward transactions, or repos, was taken in the central bank's April credit policy following the recommendations of the Second Naraismham Committee.

Earlier these firms were permitted to undertake only reverse repos, which involves purchase of securities with an agreement to sell back at a later date.

Money market dealers said that now the FIs, instead of lending in the money market, will buy government securities and then strike inter-bank repo deals to meet their liquidity problems. "They generally borrow through PDs or banks to meet short term liquidity problems especially at the time of disbursements. Now they will just buy the securities andconduct repos when they need short term funds," a source said.

According to money market sources, after the exodus of traditional lenders from the call money market, the demand for funds will increase vis-a-vis supply which will force players to borrow from the repo market by pledging government securities as collaterals. This will also give a filip to bond trading.

The entities which have been allowed to carry out transactions are: Canbank Mutual Fund, Export Credit Guarantee Corporation of India, Exim Bank, General Insurance Corporation of India, GIC Mutual Fund, Indian Bank Mutual Fund, ICICI, IDBI, ITC Thread Needle Mutual Fund, LIC, Nabard, National Housing Bank, New India Assurance, Oriental Insurance Company, Reliance Capital Mutual Fund, SBI Mutual Fund, SIDBI, UTI, LIC Mutual Fund, JM Mutual Fund, Birla Mutual Fund, Kothari Pioneer Mutual Fund, Jardine Fleming Mutual Fund, Kotak Mahindra Mutual Fund, JP Morgan Securities, ABN Amro Securities, Deutsche Securities, Industrial Investment Bank ofIndia, BoI Mutual Fund, Sun F&C Mutual Fund, Prudential ICICI Mutual fund, HDFC, Stock Holding Corporation of India and Sicom.