Gilts seen in a narrow range as polls draw to a close

OUTLOOK: GOVERNMENT SECURITIES

Government securities are expected to trade in a narrow range this week, ahead of the results of the general elections, due on May 13.

Rising interest rates abroad and the flare-up in crude to $40 per barrel will also affect sentiment. A hike in the domestic price of crude oil impacts inflation, which stood at 4.26 per cent last week.

Yield on the benchmark 10-year paper is expected to edge up this week.

Reuters adds: Rate hikes by the world's bigger economies, led by the US, could hit foreign capital inflows, which have pushed up the rupee and brought surplus cash into domestic markets "" a key gilts market driver in recent years.

Traders said robust economic data from the United States, where employment surged for a second month in April, and a spike in yields of Treasury notes amid expectation of a rate rise in June would keep sentiment subdued among local investors.

Although India's central bank gives more weight to domestic factors, like inflation and growth, for framing monetary policy, it also watches global trends when deciding on local rates.

"In the US they are now pricing in a rate rise by June," said Indranil Pan, chief economist at Kotak Mahindra Bank. "Given this, some foreign flows could turn back on better returns on US yields."

"The hardening of global yields will cause nervousness here," said Mahendra Jajoo, head of primary dealership at ABN-AMRO Securities. "Also, the prospect of higher oil prices will keep investors jittery."

Investors worry about the potential inflationary effect of likely higher administered oil prices in India once the election is over next week. Higher inflation gives the central bank less leeway to pursue a softer monetary policy bias.

State-run oil companies have kept fuel prices steady since January on fears any increases would be unpopular in the run-up to the elections.