10-year paper yield likely in 6.70-6.80% band

OUTLOOK: Government securities

The ten-year benchmark paper is expected to rule in the 6.70-6.80 per cent range. If sentiment is bullish on account of government's decision to defer a hike in oil prices, there is apprehension on whether investment fluctuation reserve provisioning will be allowed before finalisation of the balance sheet.

Union oil minister Mani Shankar Aiyar said on Friday that the government would not increase retail prices of petroleum products. He said the government would review prices in consultation with coalition allies and take a decision by October 31.

Dealers said, even if the inflation has fallen to 7.20 per cent, lack of buying by nationalised banks in government securities has dampened spirits. Aided by fiscal and monetary measures, inflation fell by 0.18 per cent to 7.2 per cent in the week ended October 2, 2004.

The inflation level was 7.38 per cent in the previous week and 5.32 per cent in the corresponding week last year.

While banks are keen on maintaining their government securities holdings to just meet their statutory liquidity ratio requirements, most of them have been instructed by their boards to make the excess liquidity available for credit demand.

Additional investment in gilts is cautious as players feel there is no market to offload the papers in a rising interest yield scenario.

There is a feeling that at the end of the last quarter, banks booked depreciation losses.

Except for the big PSU banks which own high-yield illiquid government papers to compensate for the erosion of market value for government securities, most others will have to pay for the depreciation.

This has made the outlook for the government securities shaky.

Moreover, the Us jobs data has released less optimistic figures. Crashing commodity prices have already resulted in a shift of funds to bonds. This will keep away pressure to increase interest rates, said a bond dealer.