Outlook : Government Securities

Yield curve to steepen at the long end

Participants expect greater interest in both the long and short-term papers, and comparatively lesser interest in medium-term papers.

Prices will remain rangebound, with a 20-25 paise movement on either side in the mid-tenor segment of 8 to 15-year papers.

Price movement will be determined by the addition to the forex reserves which, in turn, determines how much additional liquidity enters the banking system. Players anticipate greater money inflows as the Reserve Bank of India (RBI) will have to buy dollars to keep the rupee at the 48.50 mark.

The sentiment will remain stable-to-positive despite the auction of government papers worth Rs 7,000 crore due on Tuesday. The underlying bearishness eased on Saturday after the tension along the country's border with Pakistan gave way to normalcy.

The prime driving factor has been the ample liquidity overhang which drove down the yield curve, especially at the shorter end. This is evident from the fact that on an average, bids worth more than Rs 10,000 crore are made at the daily repo auctions.

With the central bank buying dollars in the market (and in the process releasing rupees into it) to check the rupee's rise, the money market faced excess liquidity last week. Dealers see the possibility of an open market operation (OMO) in the coming weeks, especially after the RBI governor Bimal Jalan stated on Friday that the central bank would take devolvements and go for OMOs whenever necessary.

Players expect some devolvement in the longer tenure paper (30-year) at Tuesday's auction as it will not appeal to the banks. The state insurance giant Life Insurance Corporation is expected to pick up a substantial portion of this, followed by private insurance companies and provident funds.