Outlook : Government Securities

Trading to remain subdued

Trading activity in government securities will be subdued this week. This is because the Reserve Bank of India (RBI), through the auction of 7.40 per cent 2012 paper held on Saturday, has indicated its intention to cool things down.

The central bank has set a cut-off price of Rs 101.51 (yield: 7.1786 per cent) at the auction compared with the security's closing price of Rs 101.70 (yield: 7.15 per cent) on Saturday.

Gilts could come under selling pressure on Monday from banks, which normally borrow from the call money market and take positions in government securities. Meanwhile, the funds-flush nationalised banks are expected to stay on the sidelines.

The prices of gilts could fall by 15 to 20 paise across the board initially, but should stabilise towards the middle of the week.

Market players feel that the purpose of the auction for mopping up Rs 6,000 crore was not to suck out liquidity but to stem the steep the fall in yields.

Almost Rs 11,000 crore came into the banking system on Saturday on account of redemption of the 11.15 per cent 2002 paper and coupon payment on the 11.40 per cent 2008 paper.

The overall sentiment will be cautious despite comfortable liquidity with banks. And securities prices are expected to be rangebound.

The market is unlikely to see any peaks, whereby the benchmark 10-year paper touched a lifetime low yield of 7.10 per cent, witnessed during the last few days.

Abundant liquidity is expected to see the auction of the 15-year bond for Rs 4,000 crore and of the 20-year bond for Rs 4,000 crore to sail through. The auction is scheduled between September 5 and September 10.