Conditions ripe for a substantial rally

OUTLOOK/G-SECs

The bond market often rallies during year-ends. This time round, there are many more reasons for it to do so. The surfeit of cash, benign inflation and last but not the least, the lack of open market operations by the Reserve Bank of India have all set the stage for the ascend.

This week, the ten-year benchmark has been forecast in the range of 5.13-18 per cent and could see heavy trading.

But dealers also said that in the initial part of the week, there could be selling pressure as most of the players who had built up heavy positions last week will book profit and make room for re-entry.

Last week, inflation ruled at 5.32 per cent as against 5.91 per cent in the week before.

Moreover, D Swarup, expenditure secretary to the Government of India, also clarified that market stabilisation bonds will make a part of the borrowing programme due to start from the new fiscal.

These developments added to the rally in government securities that was initially spurred by copious funds.

Dealers felt that liquidity in the banking system today is far in excess of possible draining measures.

Even if the RBI conducts open market operations through its entire stock of Rs 30,000 crore securities, the system will still be left with a surplus of over Rs 20,000 crore.

This is what lifted the gilt market volumes to a daily average of over Rs 6,000 crore last week as against Rs 2,200 crore- Rs 3,500 crore seen in the last one-and""a-half months.