Government bond yields to remain under pressure

The yield on the government bond may continue to remain under pressure on concerns over government’s large borrowing programme for the next financial year (2010-11).

On Friday, the government bond market rallied in light of concern over the fiscal stability for the European economies such as Greece, Spain and Portugal. Moreover, the auction cut-offs were in line with market expectations.

The yield on benchmark 10-year government bond (6.35 per cent 2020 paper) closed at 7.68 per cent on Friday (January 29) versus 7.59 per cent a week ago.

Dealers said the rising inflation and higher than expected rise in Cash Reserve Ratio pushed the yields up last week. The movement in US treasury yields and crude oil futures may also influence the prices next week.

Call rates to remain steady
The interest rates in the inter-bank market are expected to remain steady on ample liquidity in the system. On Friday, call rates remained stable and they moved in a range of 3.0 per cent to 3.40 per cent.

Reserve Bank of India (RBI) absorbed Rs 1,19,210 crore at the Reverse Repo window. The daily amount parked with RBI at repo window rose beyond Rs 1,00,000 crore on last three trading days. RBI did not infuse any amount under LAF Repo operation.

Rupee may remain weak
The rupee may continue to be weak against the dollar due to prospects of further fall in stock markets as portfolio investors pull out money and worries over fiscal situation in some European countries.

On Friday, rupee weakened amidst meltdown in global and domestic equity markets. It closed at Rs 46.74 against the dollar.

The forward premium rates softened across the curve. The six-month forward premium was at 2.63 per cent.

IDBI Gilts, public sector bond house, in a note said the negative sentiment for the rupee would continue due to woes of some European economies. It would heart the sentiment in equity market. Plus, global strengthening of the dollar could further put pressure.

The dollar could attract safe heaven flows.