Focus On Auction

Security prices this week will be largely determined by developments on the exchange rate front and on results of the Rs 5,000-crore auction today. Prices fell sharply last week because volatility on the exchange rate front hurt sentiment in the markets.

The auction results are also expected to affect the gilts market. If the Reserve Bank of India (RBI) chooses to keep rates low for the 11-year paper, a rally is expected in security prices. On the other hand, if the apex bank issues the security at a high rate and without a devolvement, prices would crash since the move would be interpreted by the market as a signal for higher rates.

"Already yields have been moving up and a move by the Reserve Bank of India to issue the paper at high yields would cause secondary market yields to move up even further," said a primary dealer. "The liquidity position is comfortable but the lack of appetite for long-term paper means that a devolvement is possible. Also, primary dealers are still stuck with long-term paper and this means that they would be unwilling to take on more long-term gilts."