The gilts market is expected to witness increased volatility this month on account of the Reserve Bank of India (RBI) actions that trigger a correction, or following a normal bout of profit taking, states a recent report on fixed income strategy by Merrill Lynch.
Profit taking, belied rate-cut expectations and increased external uncertainty could translate into some weakness in the short term, although analysts believe that long-term fundamentals should continue to support the rally. While the underlying fundamentals are intact, the pact of the rally and tight spreads at the long end of the curve reinforce the analysts view of increased risks to the market.
The report indicates that the RBI