Yields likely to consolidate on profit booking

OUTLOOK/G-SECs

The yields are likely to consolidate by the middle of the week as the players, who are expected to buy heavily, will book profit.

Buying in the securities is likely to go up as players feel that with the liberalisation in the foreign exchange front, the liquidity in the market will continue, backed by forex inflows.

The plans laid out by the government for stepping up domestic investment include setting up of separate funds for financing agriculture infrastructure, the core sector and small and medium enterprises.

The last week saw an auction and open market operations.

In both the occasions, the Reserve Bank of India (RBI) announced cut-off rates less than what the market had expected.

This buoyed the market as even the weighted average prices are above the cut-off prices. The cut-off yields announced for the auction of 2015 paper for Rs 5,000 crore and the open market operation through 2022 paper for Rs 6,000 crore acted as triggers for the market, leading to good buying demand. However, the improvement in the credit demand following good economic fundamentals got stronger.

Top RBI officials had indicated that although inflation will remain within the forecast, prices of primary articles have gone up beyond expectations.

This was perceived as a signal by the RBI that the apex bank is keeping open the option of revising the inflation rate.

However, the market is still jittery. Although fundamentally all factors look favourable, some banks harbour the feeling that investments could not be made heavily in the gilts to build large positions as they are not sure if the interest rates could fall further for better profit selling.

Last week , the gilt prices saw a fall following contradictory statements from the RBI.

Towards the end of the week, the sentiment improved following various government announcements ensuring a steady forex inflow to maintain liquidity.

Another factor that worried the market besides inflation was a statement made by the RBI governor.

The governor said even if the market stabilisation fund is established and bonds are issued , it will not affect the market.

Rather, market operations will continue through open market operations and the state government debt swaps.

In fact, the RBI had last week announced on tap sale of Rs 6,000 crore under the debt swap scheme and about Rs 2,000 crore as part of regular market borrowings on January 19.

Besides, the Maharashtra government will raise Rs 300 crore through auction on January 12.