According to fund managers, almost all the foreign banks active in the forex market sold their holdings in government securities worth Rs 858 crore. "Most banks wanted to remain liquid in order to buy dollars from the forex market when the rupee was hovering at 43.37 against dollar," money market sources said.

Prices in the government securities market witnessed a reverse trend as those of short-term securities fell. However, money market dealers are of the view that the fall in short-term government securities prices is a temporary phenomenon and the prices will stabilise soon. "It is very likely that looking at the current trend, the Reserve Bank of India might fix a lower yield for the five-year government paper to be auctioned on Thursday," said a moneymarket dealer from a private sector bank.

Most foreign banks were selling the three-year government loan maturing in 2001 offering a coupon of 11.55 per cent, the recently auctioned four-year paper offering a coupon of 11.68 per cent and the two-year paper maturing in 2000 offering a coupon of 11.64 per cent.

Most banks having substantial exposure in the forex market sold securities in the morning and bought dollars when the rupee was holding at 43.35-37, money market dealers said.

The impact of huge selling by foreign banks resulted in a crash in the prices of short-dated securities. The 2000 security offering a coupon of 11.64 per cent was selling at Rs 100.15-25 compared with Rs 100.30-35 in the morning. Meanwhile, the 2001 government loan was selling at Rs 100.20-24 in the afternoon compared with the morning level of Rs 100.35-40.

The currency stabilised in the afternoon after the RBI intervened, which saw foreign banks covering their positions in the securities market. Most of these banks boughtshort-term securities at a lower rate in the evening, incurring a substantial gain.

The wholesale debt market of the NSE witnessed trades worth Rs 548.96 crore. The 11.55 per cent government loan maturing in 2001 was traded actively worth Rs 198 crore at a yield of 11.42 per cent and the 11.68 per cent government loan maturing in 2002 was traded worth Rs 35 crore at a yield of 11.60 per cent.