Government securities will continue to rally during the initial part of the week owing to good liquidity levels. Later, in preparation for the state development loan sale, profit selling is expected.
Although there was enough liquidity in the system, price movements in gilts was restricted as players feared an open market operation (OMO) by the Reserve Bank.
However, with the RBI governor allaying fears of an immediate open market operation, players could break the cautious path tread over the last two weeks. The gilts market will be propelled by good liquidity but the inflation figure will be a matter of concern.
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The US data to be released by the Federal Reserve this week will also be crucial as an optimistic outlook will push up yields. Last time round, following optimistic data released from US, the 10-year US treasury bond went up from 3.65 per cent to 4 per cent. Following that, gilts prices in India as well fell.
The last week started on a dull note, with prices remaining rangebound or falling in certain tenors owing to profit booking by mutual funds.
The buyback of gilts conducted by the RBI on behalf of the government to reduce the weighted average cost of borrowings failed to catch market favour. In fact, at an original discount of 7.68 per cent odd to the market price, the RBI could get only 8,800 bids as against a target of Rs 25,000 crore.
Thereafter, it lowered the discount to 7.5 per cent, which resulted in 14,4300 odd bids. As against informal target of Rs 5000 crore, the government had to shell out only Rs 2,500 crore of premium to banks in lieu of the buyback.