Most bankers were borrowing money from call market at an average rate of 6 per cent and striking forward deals with traders for the three-year paper below par between Rs 98 and Rs 99, earning a spread of 2.5 paise to 3 paise for a three-day lock-in period. According to market sources, forward deals worth around Rs 60 crore were struck on Thursday.

A fund manager from a private sector bank said: "Most banks are looking at all options as the market is quite dull." Market sources maintained that most banks were seen borrowing cheap funds from the call market at an average rate of 6 per cent and werestriking forward deals with other traders to be expired on Monday for the on-tap paper to be issued on Friday offering a coupon of 11.55 per cent.

They are able to make a spread of 2.5 per cent to 3 per cent after taking into account the interest paid on the overnight money and the cost of selling the security below par. "Most banks are locking the security for a three-day period. After selling the security 2 paise below par and paying 1.5 paise interest on call, the banks are making between 2.5 paise and 3 paise," said a fund manager from a leading security house.

According to market sources, considering the appetite in the market for the three-year paper, the Reserve Bank is expected to mop up around Rs 2,000 crore through the tap stock.

The central government announced the auction for the `on-tap' bond of three-year maturity earlier this week. This is the third tap stock offered by the RBI in the current fiscal. On June 19, the Reserve Bank offered two on-tap bonds -- 10-year and six-year paperscarrying coupons of 12.10 per cent and 11.75 per cent, respectively. The RBI mopped up Rs 5,030.31 crore through the twin tap stocks.

By offering the three-year paper at a market-driven yield, the central bank is clearly giving a signal that the short-term interest rates are expected to move in line with the market, senior bankers said.

"The coupon of the three-year on-tap bond is identical to that of the three-year security auctioned earlier this month, 32 per cent of which devolved on the RBI," market sources said. The tap stock will be issued for a minimum amount of Rs 10,000 and interest will be paid half yearly.