There is also speculation that if these rates continue to run at their present level, bank interest margins would definitely come under danger. In addition to this, all those corporates which have borrowed at rates linked to money market rates will also see their funding cost rise.

Another problem for banks with cash shortage is that this is a highly unusual for it. It generally occurs at the beginning of a quarter since this is the time when money that has gone out of the system, by way of taxes, comes back in the form of government spending. This quarter, the government is yet to spend the Rs 16,613 crore of cash balances with RBI as of end-June.

Bankers are attributing this cash shortage to three main factors. First, banks have been asked to maintain higher cash balances with RBI. Second, the central bank has been selling dollars which results in a fall in rupee funds. And third, the government is yet to spend funds worth over Rs 16,613 crore, raised by way of taxes.

For most of the year, money market rates have been ruling within the bracket decided by the RBI. The repo rate determines the higher end of the floor and it stands at 8.5 per cent. Repo rate is the rate at which the central bank lends to banks. The lower point is fixed by the 6 per cent reverse repo rate -- the rate at which RBI borrows.

RBI's sale of dollars is evident from the position of forex assets. In the latest week ended June 27, they have dipped by Rs 8,418 crore.

S Raghavan, head of treasury-fixed income at IDBI Gilts said, "Had it been exporters selling dollars, it would have caused more funds to enter the banking system. This has to be RBI selling dollars in a bid to prevent a sharp fall in the rupee and also rein in money supply into the system at a time when price levels are close to the 12 per cent mark. This also helps the central bank control import costs, especially for oil companies."

However, lack of money supply is not the only reason why banks are suffering. The demand side is also putting pressure on the banks. The central bank had hiked the CRR on 24th June to be effective from July. Since July 1, banks have had to keee a higher portion of their deposits in the form of cash reserves (CRR) with the central bank. Presently, the banks keep 8.5 percent of their deposits with RBI against 8.25 percent in June. However, by mid-July, CRR would increase to 8.75 percent leading to another hike in the deposits kept as CRR with RBI.

At a time when deposits are rising, the incremental CRR requirement also tends to go up. On the implication of this whole trend, YES Bank chief economist Shubhada Rao says, "The central bank is unlikely to resort to further monetary tightening on July 29. However, for the fiscal year as whole, some more tightening is expected."