With the rapid growth in bank credit and falling prices in the government bond market, public sector banks, including the State Bank of India -- the traditional lenders in the overnight call money market -- have become borrowers.

Not all of them are borrowing money to take care of their temporary asset-liability mismatches or reserve requirements. They are also arbitraging between the Reserve Bank of India's repo window and the overnight market.

Most of the public sector banks, with their huge government securities portfolios, are availing of liquidity from the RBI's repo window at 6 per cent and lending the money to private and foreign banks at 6.15-6.2 per cent.

Under the repo arrangement, these banks can draw one-day liquidity by pledging gilts with a contract to buy them back. Private banks are short of such securities.

This way, dealers said, the public sector banks were making a spread of 10-25 basis points, while the funding cost of foreign and private sector banks had substantially gone up in the last few days.

Foreign and private sector banks are also seen executing sell-buy swaps in the foreign exchange market to generate rupee funds. These banks are selling dollars to buy them back in future in return for rupee funds. This led the spot rupee to gain up to 45.0950/1050 after opening at 45.21 during the day.

The liquidity crunch has led to a jump in large corporate loan rates by 50-150 basis points. (One basis point is one hundredth of a per cent.)

Said an SBI executive, "Liquidity in the market has technically dried up owing to the rapid credit growth and the increase in the cash reserve ratio (CRR). We are borrowers as well as lenders of a couple of hundred crores every day in the call market. Those days are gone when we had the luxury of being the largest lender in the market."

Credit and investment growth for the financial year so far has outpaced deposit growth. Bank credit growth year on year has been as high as 28 per cent, way above the average growth rate of 18 per cent.

In the previous quarter, when credit growth was not so robust, banks invested the funds raised from deposits in the securities market. "Large chunks of investments have been locked in and cannot be freed since we will have to sell the securities at a loss," said a credit officer at the Union Bank of India.

Prices have plummeted in the market, with the most liquid gilt, the 7.38 per cent 2015 paper, falling by as much as Rs 17 since the start of this financial year.

Almost all public sector, private sector and foreign banks have become borrowers in the call money market over the last month. The RBI has been injecting liquidity into the system --- over Rs 7,900 crore on Tuesday and over Rs 3,700 crore on Monday.

Only a few banks like Indian Bank, Punjab National Bank, Indian Overseas Bank and the Central Bank of India were still lenders while all other banks were now borrowing, market sources said.

Lenders in the market are primarily the Unit Trust of India, other mutual funds and the Life Insurance Corporation. The traded volume in the call money has shot up to Rs 8,000 crore while that in the gilts market has slipped below Rs 2,000 crore.