Yields on government securities could head lower provided the Reserve Bank of India does not intervene by pressing open market operation (OMO) sales.
Otherwise, gilts will see range bound trading in the coming week. The market, which will be driven mainly by ample liquidity, should see alternate bouts of profit taking and buying. Fears of the central bank coming out with an OMO sale will continue to weigh on the market.
Gilts will see a good rally only if there are triggers by way of a repo rate cut or positive announcements by the finance minister. Players feel that a repo rate cut is on the anvil as there is an inversion at the short-end of the yield curve.
The overnight repo rate is ruling at 5.50 per cent while the one-year treasury bill is quoted at 5.40 per cent. The difference in yields (spread) between the one-year treasury bill and the 10-year gilt is 59 basis points; that between a 10-year and 20-year gilt is 29 basis points; and that between a 20-year and 30-year is 16 basis points. The scope for compression of yields of medium-tenor gilts (gilts of 10 to 20 year residual maturity) is limited.
The benchmark 10-year paper, which Saturday was last dealt at a yield of 5.98 per cent, is expected to hover in the 5.93 per cent to 6.03 per cent band next week.
The market expects the central government to raise fresh funds, despite the market borrowing programme being complete this fiscal. Drought issues, coupled with bailouts for IFCI and the Unit Trust of India, will see the government exceed its borrowing programme.
