Uncertainties offset liquidity cheer

OUTLOOK/ Government securities

The funds position in the market is more than adequate but there is little to cheer for the gilts mart because there are too many uncertainties.

The first of which is the high inflation. Market participants believe that owing to the higher base effect, the headline numbers will come down.

However, going by the Reserve Bank of India's Currency & Finance Report released last week, they feel that apart from the base effect, other factors that influence the price index are not showing signs of easing.

For instance, crude oil prices have just moderated to $29-30 per barrel, while commodity prices are still up.

Next on the list of worries is the messages being emitted by the US Federal Reserve which met last week.

The refrain in the market was that the Fed has signalled a very conservative yet firm stance that base rates are on their way up.

Some of the foreign banks have already made an aggressive forecast of Fed rates rising by almost 100 basis points towards the year end. They feel it's is only waiting for getting good employment data.

Thirdly, looking at the abundance of liquidity in the market, dealers feel it's time for the scheduled auction of Rs 5,000 crore or the conversion of special deposit securities into bonds for repayment purposes. This should result in marketable securities for open market operations, they feel.

Meantime, profit booking and cautious trading will lead to thin volumes this week. The trend has been going on for quite some time now.

The ten-year benchmark yield is expected to rule in the range of 5.15-5.17 per cent.

"With prices going up and deficit expected to widen following numerous tax cuts, interest rates are expected to firm up a bit," said a dealer.

There has been repeated assurances from the regulatory authorities on inflation easing and no possibilities of additional government borrowings, but it had failed to soothe frayed sentiments, he added.

Last week, Bank of New Zealand hiked its base rate by 25 basis points. Further, the meetings of Bank of England and ECB are also expected to throw some light on the international interest rate movements.

Last week, the upward bias in inflation led to a selling spree in the gilts market.

As a result, the ten-year benchmark paper, the 7.27 per cent 2013, ended at a yield of 5.19 per cent as against 5.14-5.15 per cent on Wednesday.