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Poornima Mohandas

MUMBAI, March 5

DESPITE favourable budgetary announcements and rate cuts by the Reserve Bank of India, the debt markets are behaving strangely. Market participants are baffled by the way g-sec prices have been falling in the past three days.

"The market is yet to come to terms with the Budget and the rate cuts by the Reserve Bank of India,'' said the treasury head of a private-sector bank. All seemed to have happened too quickly giving the markets insufficient time to absorb the changes, the players still seemed to lack confidence, he added.

Although G-sec prices rallied on the day of the Budget with gains of up to Rs 6, this week has seen the reverse with heavy profit-booking.

What is happening in the market over the past two days is illogical, concede dealers. Following the 50 basis points repo rate cut, the g-sec prices should be surging; however, the reverse has been observed this week. The ten-year benchmark paper has lost Rs 4.20 since Monday's opening levels.

"With no buying interest in the market, prices are drastically dropping at the rate of 10-40 paise from one trade to the next,' said Mr Subir Biswas, Country Treasurer, India, ABN-Amro Bank.

With the overnight repo rate now reduced to 5 per cent, extrapolation shows that the yield on the ten-year benchmark Government security should be below the 6 per cent mark.

However, the 9.81 per cent 2013 paper today closed higher at 6.32 per cent, much to the astonishment and dismay of dealers. "This week, the market had only sellers, particularly nationalised banks selling to book profits before the end of the financial year,'' said the treasury head of a public-sector bank.

With the last month of the financial year running, banks, which had bought earlier at very low prices are in a rush to sell their securities and realise profits. However, the profits being made are dipping steadily with prices falling.

Many nationalised banks seemed to prefer putting their money with the RBI through the repo window at a rate of 5 per cent, rather than play in the g-secs market, said a dealer in a bank.

Primary dealers were largely shying away from the action sitting on the sidelines in a thinly traded market, with traded value capped at an average of a mere Rs 2,000 odd crore. Some players feel, though the regulator has sent out all favourable signals to the market, the Iraq crisis is hanging over people's heads and players are wary of taking positions.

Players are divided over whether the sentiment in the market will improve, especially with the Rs 6,000 odd crore State loans sale coming up this week.

"The last month of the financial year is rather unfavourable for a bull run with most players in selling mode,'' said an official with a PD.

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