Outlook: Government Securities

Government security prices to rally, but mainly at the shorter end

Gilts are likely to increase by 50-75 paise during the week driven by the continuing abundance of funds in the banking system. According to the indicative calendar, there will be an auction only in the last week of August, and this should keep the sentiment upbeat.

The Reserve Bank of India (RBI) is unlikely to conduct any unscheduled auction/s this week. The central bank conducted a twin auction for Rs 7,000 crore last week, while according to the calendar, it was to conduct an auction for Rs 8,000 crore. This gives the feeling that the government may not have to borrow very soon.

Dealers said most of the action in gilts will be in the 5-10 year maturity segment as prices have already rallied quite a bit at the longer end of the maturity scale.

The rally in the long-term papers, money market dealers said, was mainly due to the participation of non-active players such as insurance companies. They are expected to keep off the market during this week.

There may be an open market auction in the second half of the week

A section of the dealers, however, feel the RBI may not like the gilts to rise too much and yields to fall very fast. This may spur the apex bank to announce an auction on Thursday and/or Friday.

The RBI had taken such an approach earlier this fiscal and dealers don