This week is expected to start with profit booking for two reasons. Following the repo rate cut, players had rushed to buy gilts, which they would like to sell and book profit before the market bounces back with a rise in yields.
Secondly, with the conversion of Rs 19,000 crore worth of special securities into dated paper, players feel that the RBI is well-armed with the instruments to mop up excess liquidity through open market operations. More so because a lot of the funds are being parked in repos.
Following the statement on the flatness of the yield curve by an unnamed RBI official, players feel that long term yields will go up further.
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The short-term yield has already gone down following the repo rate cut. Although there is no scheduled auction or major outflows from the system, these apprehensions are weighing heavily on the sentiment of players.
Once profit booking is over, fresh buying interest is likely to come from banks and that is when consolidation should begin. If a open market operation precedes the scheduled auction, yields will go up much faster.
Last week witnessed the highest volume recorded in the gilts market in a day when the National Stock Exchange wholesale debt market segment turnover touched Rs 13,900 crore.
This was followed by news of the repo rate cut which resulted in a fall in the long-term as well as in the short-term yields.
While the interest in the short-term papers reduced as yield differential was no longer attractive, the long-term segment saw buying interest from those who had offloaded long papers in the week before