In the process, it has discounted a 25 basis points cut in the repo rate. The 10-year gilt is seen hovering in the 4.95-5.00 per cent band in the coming week.
The yield differential between the one year and 10 year gilts at 45 basis points is already very narrow. Further compression of this differential is unlikely.
Only a big trigger, like the central bank trimming the repo rate by 50 basis points, will spur a rally. A small cut of only 25 basis points could, in fact, spark a sell-off, thereby hardening the yields.
Liquidity will continue to be ample in the banking system as foreign institutional investor inflows and non-resident external (NRE) deposits accretion continue to be robust.
Further exporters are also booking their forward receivables as the rupee is appreciating. All these factors will see the RBI sterilise dollars, which in turn will release rupees.
The Reserve Bank of India will hold a sale (re-issue) of 5.69 per cent 2018 gilt on Monday for a notified amount of Rs 5,000 crore through a price based auction using multiple price auction method.
