Gilts may turn bearish

OUTLOOK/ GOVERNMENT SECURITIES

The government securities market is expected to remain bearish this week owing to the global tilt towards a rise in interest rates.

With the Bank of England firming up its base rate by 25 basis points at its last meeting from 4.25 per cent to 4.5 per cent, the US authorities have called for tightening of their monetary policy. This has raised concerns among market players who are anticipating a 50 basis point hike in the Fed rates.

The 10-year benchmark government paper is expected to rule in the range of 5.33-37 per cent. The ample liquidity situation, which used to lift gilt prices, is slowly weakening as evident from the outstandings at the Reserve Bank of India's repo auctions. The market lacks direction and there are no major buying demand to support gilt prices, said a dealer.

The underlying fear in the market is that the healthy liquidity scenario, which used to be one of the major drivers of the rally in gilts, might come under strain with foreign institutional investors remaining inactive in the domestic equity markets.

The inflation rate, which was at 5.03 per cent last week, failed to cheer up the markets. Moreover, with oil and commodity prices riding high, there is little scope for a fall in inflation rates.

This is despite the RBI governor reiterating that the inflation rate will remain below five per cent. Till then, bottomfishing is the only way to help the market post a recovery.