Analysts said that the latest hike will come into effect just before the banks are flushed with liquidity on account of the Resurgent India Bonds. The bonds are expected to bring over Rs 8000 crore into the system in the next fortnight. RBI governor Bimal Jalan while announcing the April credit policy had made it clear that CRR cuts would be announced "during the course of the year in the light of the evolving circumstances". The ultimate objective is to bring down the CRR to 3 per cent in the long run to raise banks' profitability, Jalan said.

According to money market sources, the tight money policy is expected to distort the short-term yield curve for government securities. The RBI is likely to hike the yield of the 14-day and91-day treasury bills on Friday, to restore some semblance to the government securities market. "There won't be much impact on the longer end. The medium term securities will also realign itself," an analyst in a leading brokerage house said.

Money market sources are of the view that the hike in CRR cut is a temporary measure to immediately suck out excess liquidity from the system.

According to sources an estimated amount of Rs 1000 crore is expected to come into the system during the last week of August by way of redemption of the 364-day treasury bills and interest payment of a few securities.

"This is expected to create a deficit of about an approximate Rs 4000 crore," said a market dealer. However the RIB proceeds which are expected to come into the system in the last week of August will be able to balance the money supply in the system.

According to money market sources, currently there is no dearth of liquidity in the system. "Most banks are holding excess liquidity and taking advantage of thearbitraging opportunities available in the system due to currency fluctuation," said a money market dealer.

Meanwhile, money market sources are of the view that the tight liquidity in the system may jack up the call rates to 15 per cent level by the month end. "Banks will now have to run to cover. The call rates have already gone up to 9.5-10 per cent," a dealer in a private bank said.

On January 16, the RBI hiked the CRR by 50 basis points to 10.5 per cent to check the currency fluctuations. That was second instance of CRR hike in the Jalan era, the first being a 50 basis points hike on December 2, 1997. Subsequently, CRR was cut to 10 per cent.