Gilts rally on lower inflation expectations
The prices of government papers rallied by 20-80 paise across maturities. According to dealers, the market is of the view that inflation has peaked and henceforth the rise will be not more than 5-6 basis points. Moreover, the Reserve Bank of India has announced the auction of government paper.
Dealers pointed out that the RBI chose to issue a ten-year paper, indicating that it is not comfortable with the high yield of 9.5 per cent seen last week. Moreover, the auction will be based on uniform prices and not multiple price-based, which is the case usually. In uniform price based auction, the banks will receive the paper at one price, leaving little scope for the market players to trade and jack up rates.
This was a big trigger for the market, resulting in 23-30 basis point rise in the prices of ten-year benchmark paper. Incidentally, brisk trading in the ten-year maturity and dull trades in the short term due to concerns on liquidity resulted in inverted yield curve. While the ten-year paper is trading at 9.05 per cent, the 364 day t-bill is at 9.15 per cent.
Forex: Dull trading
The annualised premium for six month and one-year forward dollars closed at 5.3 per cent and 4.41 per cent respectively.
Liquidity: Tight situation
Liquidity remained tight, with the Reserve Bank of India infusing around Rs 52,000 crore into the market under the repo route. The outlook is bearish for the shorter end of the market and not on the long term, primarily due to the uncertain political situation.
In the overnight interest rate swap market, the yields for the one year sap went up from 9.52 per cent to 9.65 per cent. On the other hand, the rates have fallen for remaining maturities such as two year and three years.