Bearish undertone to dog trend

Outlook/ Government securities

 Both the monetary and credit policy and the mid year economic review did not indicate that soft interest rate as a policy will be pursued.

 Both these indicated an upward revision in the GDP and signs of credit pick up. The mid year economic review, however, hinted at lowering of credit costs which boosted market sentiment, but, temporarily.

 Inflation rate last week was pegged at 5.10 per cent, which is a further dampener. The most worrying factor has been the concern over abundance of liquidity, backed by foreign exchange inflows which got converted into rupees under the sterilisation process of the central bank.

 With the new policy on external commercial borrowings, inflows, other than ones aimed at infrastructure projects and textile and steel, will be under severe scrutiny of the regulators. This is expected to tighten liquidity in the system.

 In the medium term, it is also believed that rising rates elsewhere around the globe will result in easing of foreign capital flow into India.

 Therefore, the market is of the view that prices will be either rangebound or fall as there are no huge buying demand for gilts.

 While mutual funds will continue to sell since the confusion over corporate bonds is yet to subside, major public banks are unwilling to build huge positions in gilts as they are not sure of good levels to offload in future.

 Even foreign bank-owned primary dealers are staying away from in gilts for the same fear. It could be mentioned that owing to a rise in interest rates in the fourth quarter of 2002-03, trading margins of primary dealers got hit badly as they could not offload the gilts and corporate bonds.

 Government securities last week continued to fall with the 10- year benchmark paper witnessing a rise in yields from 5.01 the week before last to 5.10 per cent towards the end of last week.

 The primary reason for the market to crash in bits and pieces was the lack of outlook on interest rate or rather signs of rates going up in near future as a fallout of interest rates rising globally and expected pick up in domestic credit.