The bond market was down for the third consecutive trading day yesterday with the budget proposal to levy a 0.15 per cent transaction tax on purchases of securities routed through stock exchanges playing havoc with the market.

Bankers said the biggest loser if the transaction tax came into force would be the government as it would find it difficult to push through its annual borrowing programme.

Moreover, the banks will run a huge systemic risk as the statutory liquidity ratio (SLR) holdings will lose relevance in an illiquid market where investors are staying on the sidelines.

"The SLR holdings are meant to be liquidated to generate cash in hours of crisis. In an illiquid market, banks cannot do that," said the chairman of a large bank.

The Reserve Bank of India is in talks with the finance ministry on the matter. If the government sticks to the proposal, 17 primary dealers will be forced to close shop. These primary dealers collectively made a pre-tax profit of Rs 1,470 crore in 2003-2004.

Had they been subjected to the transaction tax last year, they would have to cough up Rs 450 crore, based on the volume of trade in the gilts market.