Long, Medium-Term Papers To Be In Focus

This week will witness heavy trading but players will be cautious to avoid abrupt price spikes. This is because, there is a fear that abnormal price movements will result in an open market operation by the Reserve Bank of India (RBI) to suck out excess liquidity.

Trading interest will be mostly in long and medium-term papers, which were the flavours of last week as well.

Apart from abundant liquidity, other factors that will come into play this week will be the declining rate of inflation, the expectation of a 50 basis points cut by the US Federal Reserve, and a growing consensus among participants that a repo rate cut by the RBI is a given, though it is unlikely to happen in the immediate future.

 

Last week started with a dull note with fears of an OMO by the apex bank. But brisk trading erupted following a central bank statement denying an immediate OMO.

There was a 10-20 paise movement seen in papers with 15 years or more maturity due to good yield differentials.

This spurred public sector banks into buying, which added to the rally in prices. The market has already factored in the 25 basis points cut in the US Fed rate. Therefore, it can only react if there will be a bigger cut of around 50 basis points. Anyway, the cut, if it comes about, will reinforce the trend towards softer interest rates.

Meanwhile, the yield on the benchmark 9.81 per cent 2013 paper touched 5.73 per cent after ruling around 5.76 per cent for some time in the initial part of last week. Reuters adds: Medium-term yields are expected to fall the most, which will flatten the curve.