Arena Primed To Clock A Rally

No intervention is expected from the Reserve Bank of India (RBI) before the auction of Rs 9,000 crore worth of gilts is over on August 7.

The announcement of the auction itself eased two fears of the participants. One, the amount was as per the auction calender.

This has signalled that the RBI is comfortable with the liquidity driven rally and it does not plans to strain funds.

Second, players perceive that falling gilt yields are also not a major concern for the regulator for now.

Yield on the 9.81 per cent 2013, which is termed as the benchmark paper, has touched a low of 5.55 per cent during trading sessions on Saturday last week as against the situation sometime back when the market was struggling for the benchmark paper to breach the psychological barrier of 5.60 per cent.

 

While inflation and liquidity will be major boosters, each increase in price will be accompanied by a bout of profit booking. During the week, profit booking is expected to go up in preparation for the auction.

However, one dampener could be the international scene. In response to the encouraging GDP numbers released for the second quarter, there has been heavy selling of US bonds.

Yields on 10-year US treasury papers rose from 4 per cent to 4.49 per cent last week. the dollar has also started appreciating against the euro and other major currencies.

If the price of US treasury bonds continues to go up, the soft rate line taken by regulators in India may be in for a rethink.

As of now, however, the local interest rate outlook continues to be soft with inflation expected to be favourable. The situation, in turn, is conducive to legitimise the long-sought repo rate cut.

Last week started with heavy profit booking as the week before that had ended on a hunky dory note after the RBI governors