Rally seen in prices

OUTLOOK/ Government securities

The benchmark 7.38 per cent 2015 gilt is expected to rule in a range of 7-7.30 per cent this week. The government is maintaining credit up to Rs 20,500 crore with the RBI and the market is expecting the postponement of the auction slated for next week. If this happens, it will lead to a rally in government security prices, said players.

The liquidity strain is likely to reduce and the system will receive funds through government expenditure, forex inflows and cash balances returning to banks following the festivities.

However, if banks continue to hike deposit rates, and subsequently lending rates, it will have a negative impact on bonds as yields could spike up. If there are no major developments, the first-half of the week will witness some buying demand as part of value buying.

The inflation rate is expected continue to stay steady around 7.08 per cent, players said. The market has already factored in the US Federal Reserve's move to hike its funds rate by 25 basis points to 2 per cent last week.

Recap: The cut-off for the five-year government paper auctioned last week at 7.21 per cent led to a sharp upsurge in yields. This was accentuated by lower liquidity, which forced banks to seek support from the RBI.