| Pointing out that liquidity will be the main driver of the market this week, a report released by the Kotak Mahindra group says, "Though a largish outflow of Rs 8,000 crore is scheduled for this week on account of the on-tap sale of a state loan during the week, there is unlikely to be any worry on liquidity." |
| In this backdrop, dealers expect the ten-year benchmark yield to move in a tight range of 5.12-5.15 per cent. Profit booking and cautious trading will lead to thin volumes in the market, which has been the trend for quite some time. |
| With prices going up and deficit expected to widen following the numerous tax cuts, interest rates are expected to firm up a bit. |
| There have been assurances from the regulatory authorities on inflation and also on there being no additional borrowings this year. |
| But this is unlikely to boost sentiment as inflation above 6 per cent has put paid to all hopes of a further fall in yields. |
| Dealers feel that rates should now realign to make the real interest rates positive. Last week, the Reserve Bank of India announced an unusually high cut-off yield of 6 per cent (as against a yield of 5.11 per cent for 10-year gilt) for the ten-year Maharashtra loan that was auctioned. |
| A dealer the state government paper was not well bid as the cut-off was at 6 per cent, while the weighted average worked out to 5.81 per cent. |
| He added that usually, at auctions or at on-tap sales, the spread between the gilts and state government stock ranges between 25 and 50 basis points whereas in the case of this paper, it is almost 80 basis points. This led to feeling that the higher cut off rate was indicative of a firming trend in gilts. |
| This spawned profit selling and prices on an average started falling by 10-20 paise every day. |
| The fall was hastened by fresh triggers and apprehensions over rising inflation. |
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