Banks are, however, unlikely to hike their prime lending rate (PLR) unless the RBI raises the bank rate. Foreign and new private sector banks are expected to raise their short-term deposit rates marginally over the next few days.

Short-term treasury bills maturing in October were traded at a yield of 14-15 per cent on Thursday as against the previous day's yield of 9-9.5 per cent. The 60-day commercial paper which was earlier offering 9-9.50 per cent was being offered at a yield of 13.50-14 per cent.

The increase in the repo rate has set a benchmark for the interbank overnight call money rate which is expected to tighten. According to money market sources, the RBI has signalled the firming up of interest rates at the shorter end byraising the three-day fixed rate repo.

Money market sources are of the view that this is a temporary measure which will make the cost of holding dollars more expensive and reduce arbitrage opportunities. This also affected the forward market with the one-month forward premium jumping to the 19 per cent level.

"The apex bank is trying to curb the unwanted artificial demand which was created in the market due to currency fluctuations," said money market sources.

According to sources, the confusing signals given by the apex bank from time to time has created panic in the market. "Earlier, the RBI was signalling a fall in interest rate at the shorter end whereas now it is indicating hardening in the interest rates at the shorter end," said a money market dealer.

"The measures will encourage banks to remain liquid and discourage them to take positions in the forex market," said a dealer at a private bank. The hike in the fixed rate repo will reduce the arbitrage opportunities between the call money rateand forex market which most banks were indulging into earlier.

When the fixed rate repo was at 5 per cent and call was tight -- between 6.5 and 8 per cent -- most banks were borrowing funds at 6.5-8 per cent from the interbank market and were buying dollars when rupee was ruling high at 43-43.60 level earlier this week.

In the last one week call rates have moved in a range of 6.5-9 per cent as most banks were taking positions in the forex market. "The central bank was also not able to mop up funds through a fixed rate repo in spite of adequate liquidity in the system," money market dealers said.