Outlook : Government Securities

Gilts prices should rally

Government security prices are expected to move up by 50 paise to Re 1 this week as the banking system will continue to be loaded with cash. The indicative calendar shows an auction this week, which will keep the sentiment upbeat. Beyond this, players do not expect any unscheduled auctions.

However, there can be a slight shift in attention from the long and the very long ends of the maturity scale to the short and medium ends.

This is because last week the yields at the long end dipped drastically causing the curve to flatten. Dealers said the yield curve is due for a correction and it will happen through a skid in the short-term yields.

There may be an additional OMO auction later in the week

A section of the money market feels that there can be another open market operation (OMO) auction by the Reserve Bank of India (RBI) and it can check the rise in the government paper prices. Low yields on gilts, dealers said, have given the central bank the opportunity to offload its gilt holdings.

The impact of the open market operation auction, if it happens, will depend on the notified amount, the tenure of paper put on the sale window and the price at which the Reserve Bank of India is ready to sell it.

However, the refrain among the dealers on Gilt Street is that the effect of the open market operation will not be an enduring one.

During the last two OMO auctions conducted, the RBI had set the cut-off yields below the levels expected by the participants, implying that it still favours a lower interest rate. This means sentiment in government security prices will remain good, they said.