The money market saw its worst crunch in a long time on Thursday as banks borrowed a record Rs 82,915 crore from the Reserve Bank of India?s (RBI) special repo window. Had it not been for the special facility offered by the central bank, the overnight call money rate would have ended higher than 5.20-5.25%, dealers said. On Wednesday, banks had borrowed Rs 70,000 crore.

Three-month certificate of deposits (CDs) were quoted at 6.50-6.80% while commercial papers traded at rates that were flat compared with the Wednesday levels of 6.70-80%. One-year CDs were traded at 6.75-6.85%, compared with 6.70-6.80% on Wednesday.

However, dealers believe the worst may be over and that banks will not borrow such a large amounts from here on. The government is scheduled to borrow Rs 15,000 crore on Friday.

Says RVS Shridhar, president & head of markets at Axis Bank,?We saw some banks borrowing to make BWA payments on Thursday and of late, we have also seen several of them issuing CDs. I do not think banks will need this kindof money on Friday or even next week.?

Dealers believe this is just a temporary phase and say liquidity will come back into the system once the government starts spending.

Observes Moses Harding, head of Global Markets Group at IndusInd Bank, ?This week was probably the worst phase, but the damage so far is limited. With call money rates below 5.5% and stability in bond yields at 7.55-7.65%, banks are comfortable and positive about the outlook over the medium term. There is no cause for worry as the near term pressure would ease in July.?

The yield on the 10-year benchmark paper, 7.80% bond maturing in 2020 ended at 7.5682% as against 7.5979% on Wednesday.

Shridhar, too, believes the liquidity situation for banks will improve in due course of time. Recently, as a measure to infuse liquidity into the system, the central bank has allowed banks to maintain a lower SLR of up to 0.50% for a short period, till July 2, 2010. The RBI now conducts two liquidity adjustment facilities (LAF) operations every day, allowing banks to access funds from it.

The regulator has also availed the tool of buying back of securities to infuse some liquidity into the system. So far, Rs 20,000 crore worth securities have been bought back from banks.

With companies paying the first instalment of corporate advance taxes, around Rs 30,000 crore has moved out of the banking system. At the same time, telecom companies have paid the government close to Rs 68,000 crore following the 3G spectrum auctions, most of which has been funded by banks. Another Rs 38,000 crore flowed out for payments for wireless broadband spectrum licenses.