A Crucial Week For The Gilts Mart

This will be crucial week for the government securities market. While the rate cut by the US Federal Reserve has ensured the soft outlook on long-term interest rates continues, the liquidity management techniques of the Reserve Bank of India (RBI) has made the short-term outlook uncertain.

The cut-off to be announced at the government securities auction on Tuesday is going to be benchmark for the yield curve.

The cut-off, in turn, will depend on the market, which is agitated on the issue of liquidity.

While funds per se are not a problem, an increase in the notified amount for the gilts auction on July 1 and treasury bills auction on July 2 will lead to a substantially higher outflow of cash from the banking system.

 

Apart from liquidity, the market sentiment is also subdued. The measures announced by RBI have led to the feeling on Bond Street that a runaway rally in the prices of gilts is not appreciated at Mint Street. Players also feel that interest rates should stabilise at current levels.

A section of players is of the view that if the RBI aims to cut down on arbitrage to stem the volatility arising out of heavy foreign institutional investor inflows, then maintaining the rates at current levels is contrary to the stance.

They added that the RBI might not cut the repo rate till such time the Resurgent India Bonds (RIBs) come up for redemption in August.

These bonds carry interest rates in the 7.75 per cent range (and paid in dollars), while a US treasury note of the same tenor offers 2.13 per cent.

The high interest rate differential that is prevailing at present is one of the major factors which is pushing the rupee up against the dollar. This, in turn, will help in cutting down the losses which might be incurred in redeeming the RIBs.

Last week, the market opened on an upbeat note due to the euphoria over the US Federal Reserve rate cut.

But this did not lead to a major downward movement in yields. This is because a rally in bond prices was curtailed by the stream of announcements made by the RBI to draw out excess liquidity in the banking system.

However, in the latter part of last week, the RBI governor Bimal Jalan altered the tack taken by his deputy by stating that the measures that were announced were more for meeting the government borrowings programme than checking the excess liquidity in the banking system.