``While movements in the banks rate should not be too frequent during the course of the year the short term repo rate can be used much more flexibly in both the directions to regulate the flow and cost of liquid funds,'' RBI governor Bimal Jalan had said while announcing the credit policy.

Bankers feel the RBI will maintain a vice-like grip over the call money market through the repo rates. "There will always be an element of surpise in the inter-bank call money market. The rate will move the way the central banks and it will have total control over short-term money. Speculators have to be very careful because one does not know when the RBI will go for fixed rate repo or auction-based repo," a chief dealer in a publicsector bank said.

Said deputy general manager of UTI Bank, P Mukherjee, "This is the best instrument in the RBI arsenal and this will weed out speculation". Sources said that this was the first step towards bringing down the walls between the foreign exchange and the money markets. "This instrument with the RBI will eliminate any chance for arbitrage between the two markets," an analyst in a leading brokerage firm said.

Jalan proposes to continue the process of further enhancing the efficiency of money markets and gilts and to introduce further refinements in repo and reverse repo transactions being undertaken by the RBI to regulate liquidity conditions in the market. "The RBI has very cleverly kept a lot of room for manoeuvrability through the repo rate. When it wants it can hit anyone with it," a dealer in a foreign banks said. Immediately the instrument was put to use as the RBI lowered the fixed rate repo interest rate to 6 per cent from 7 per cent thereby setting a new floor in the money market.