Outlook : Government Securities

Hopes of a bank rate cut to drive up long, medium-tenor gilts

Prices of government securities could spin up by Rs 1-1.50 this week due to the easy liquidity in the banking system and the expectation of a bank rate cut.

The shorter-tenor gilts, however, will be steady as a reduction in the repo rate is seen unlikely for now. The buzz on bank rate cut has gathered momentum of late because of a possible delay in industrial recovery due to the flailing monsoon.

A money market analyst said the lower-than-normal rainfall will pare demand for industrial goods, which depend on agricultural income.

In such a situation, the Reserve Bank of India (RBI) may prefer to cut the bank rate. The worldwide decline in interest rates has also raised hopes of the RBI cutting the bank rate.

A section of dealers also point out that the difference between the bank rate and the daily repo rate used to be 50 basis points. But for the last one-and-a-half months, the gap stands at 75 basis points.

They expect the apex bank to correct this by cutting the bank rate by at least 25 basis points.

Profit booking towards weekend

According to the RBI calendar, there will be an auction of Rs 8,000 crore in the latter half of this week or early part of the next week. Government security dealers do not expect funds to dry up because of the auction, but said the cut-off yield set will indicate the RBI