Grooved By State Loans Auction

The government securities or gilts arena could see rangebound trading in the run-up to the on-tap sale of 6.75 per cent 10-year loans of 26 states on March 12 aggregating Rs 5,753 crore.

Trading trend will be bearish as liquidity crunch is anticipated this week (on account of state loans) and next week (on account of advance tax outflows estimated at between Rs 8,000-Rs 10,000 crore).

There will be no panic selling, though. But then there will also be no buying interest in a market, weighed down by the event risk of the US attacking Iraq.

Further, with the post-Budget rise in fuel prices, inflation could be a cause for concern.

The current gilt yield levels should sustain.

Yield on the benchmark 10-year 9.81 per cent gilt, which rose by around 37 basis points from Monday through Saturday to finish the week at 6.457 per cent, should hover in the 6.25-6.50 per cent band.

Illiquid high-coupon gilts may be targeted for trading by players to widen the yield differential between gilts having the same maturity but different coupons.

Banks will prefer to stay on the sidelines and sit on light positions. With the financial year set to close in 20 days, banks will not take any fresh positions and run the risk of providing for any depreciation in gilts prices, thereby impacting their bottomline.

The on-tap sale of state loans is expected to sail through. Liquidity could be tight post-auction with the call money ruling in the 6.00-6.25 per cent band.

Six states - Assam, Orissa, Rajasthan, Sikkim, Tamil Nadu and West Bengal - will raise normal additional market borrowing this week.

All states, except Maharashtra, Sikkim and West Bengal, will raise fresh borrowings of Rs 10,000 crore under the debt swap scheme mutually agreed upon by the centre and the states for credit to central government`s account towards repayment of existing high cost debts owed by the states to the centre, while Andhra Pradesh and Chhattisgarh will raise Rs 494 crore.