Oil price looms large

GOVERMENT SECURITIES

The going seems good in the gilts mart but a fresh surge in crude oil prices could be painful to players. Starting this week, the market is set to feel the huge base effect in the inflation rate.

As a result, the inflation rate would edge southwards, thereby providing a positive trigger for gilts.

If crude oil prices go down, there will be buying demand in gilts from players other than traders. If there's a nasty oil surprise, prices of government securities could fall afresh.

In this backdrop, the yield on the benchmark 7.38 per cent 2015 issue is expected to rule in a range of 6.50-6.75 per cent.

The succour "" and the worry "" for the players comes from the comfortable liquidity situation.

Dealers said if the RBI keeps getting over Rs 10,000 crore bids in reverse repo, it might come out with market stabilisation bills to suck out excess liquidity. The RBI had in November cancelled market stabilisation issues for two consecutive weeks.

Recap: Prices of government securities did not rally last week despite the decline in the inflation rate. Volatile oil prices and a bearish stock market cast long shadows.

Dealers felt with rising oil prices and falling share prices, demand for dollars will increase and to that extent the overall liquidity might recede.