Unchanged rates buoy gilts market

The Reserve Bank of India's decision to keep base rates - repo, reverse repo and bank rate unchanged buoyed the sentiment in the government securities market which had been donning a bearish outlook for almost a quarter.

"The exuberance in the market was mainly seen through price rally in the short and medium term maturity up to 11 year while the long term segment did not witness much price movement", said a dealer.

Volumes of trades in the gilts market jumped to Rs 1,600-2,000 crore as against Rs 1,049 core on Monday.

On the other hand, the foreign exchange market was volatile and bearish with heavy dollar demand from the oil companies.

The spot rupee opened higher at 45.06/07 as against a close of 45.12 to a dollar on Monday. Immediately thereafter, the spot rupee fell to a low of 45.28 but recovered to close at 45. 17/18 .

Meanwhile , brisk trading in government securities pushed down the yield on the 10-year paper to close 10 basis point lower at 7.45 per cent as against a close of 7.55 per cent on Monday.

The demand was mainly seen from banks who are buying securities frantically to manage a healthy composition of SLR over and above 25 per cent.

This is because, dealers said, in a bid to trim down SLR to 25 per cent, some of the banks do not have excess securities to borrow funds during liquidity crunch.

At the same time, long term papers are lagging on fear of booking depreciation in prices once yields go up.

It could be mentioned that a rise in yield affect the long term papers much more than near term papers.

For last few weeks, the yield on the gilts had been firming up with the RBI factoring in 50 basis point hike in the reverse repo rate .

In the auction of government papers held last week to kick off the government borrowing programme for the new fiscal 2006-07, the 10-year paper was subscribed by the market at a cut off yield of 7.59 per cent as against the market expectation of 7.55 per cent.