Primary dealers, banks sit on cash, keep off gilts

Dealers said a sharp rally in the prices of gilts is getting checked everyday as there is no participation by public banks and PDs, which are usually major buyers.

A dealer with a PSU bank said since there is no trigger for prices to move up or for yields to fall, it does not make sense for building large positions.

Even if one builds a position, it might amount to losses as lucrative price levels are not expected in the near future for booking profit on this. Whatever rally is happening in the market is primarily on account of liquidity.

PDs, especially the ones that are subsidiary of foreign banks, are in a hurry with the calendar year coming to a close. They don't want to get stuck up with positions which cannot be offloaded.

Foreign primary dealers, said a market participant, are already hit by losses that accumulated in their books as interest rates in the fourth quarter of the earlier fiscal rose.

Post the monetary and credit policy, which was announced sans base rate cuts, the market was given a signal of a shift in the soft monetary stance to neutral.

Later, central banks in England and Australia revised their base rates upwards. Even though the RBI governor has stated that interest rates in England in India are not related and soft interest rate stance continues, the market does not see any trigger for lowering of rates and upwards revision in prices which provides a cushion for building large position in the government securities, said a delaer.

He added that although debt volumes have not gone down, major PSU banks and PDs are staying away.

Deals are being struck between mutual funds, few PSU banks and small and old generation private banks. PSU banks are just running the book for maintaining reserve positions instead of hitting the market with the usual huge demand.

On the other hand, forward premiums have been ruling steady since last week on expectations of steady interest rates, although the near term has once again gone into discount following exporters selling forward dollars.

There is no demand for forward dollars from importers as well.

"Banks are just maintaining their inter-bank exposures with a steady interest rate outlook," a dealer said.