Gilts charge up on deficit news, auction ?cancellation'

The government securities market rallied yesterday with gilt prices moving up across securities.

According to dealers, while the low target for fiscal deficit was the trigger, a reported decision by the government to cancel the scheduled auction of Rs 5,000 crore added to the euphoria.

The government had earlier slated to borrow Rs 5000 crore from the market as part of the borrowing programme in the first week of February.

Prices of long term papers went up by 25-30 paise while the medium term papers witnessed a rise of 10-15 paise.

The yield on the ten-year benchmark paper 7.37 per cent 2013 closed around 5.15-17 per cent, down from Tuesday's close of 5.19 per cent.

Dealers added that the government decided to cancel the proposed borrowing as it holds a surplus of Rs 25,000 crore in its account.

Moreover, with the Rs 10,000 crore to be raised through state loan for swapping of high cost state government loan will result in the government receiving payments towards the debt swap. Therefore, there is no particular need for government borrowing.

Another factor that led to rally in gilts prices was government sticking to the inflation target of 4-4.5 per cent with greater emphasis on bringing down the prices.

Market sources added that this will also result in reducing the government borrowing and to that extent the fiscal deficit will also come down.

Incidentally, the government has lowered down its fiscal deficit target to 4.8 per cent for the year 2004-05.

According to dealers, the government has cancelled the first tranche of borrowing in February on account of surplus in the account.

Dealers said that with no pressure for government borrowing and liquidity afloat, bond prices are poised to rally further with dip in yields.