"Liquidity outlook is comfortable, especially with Rs 4,500 crore inflow on November 6 on account of CRR cut. Though excess liquidity may be sucked out by an auction or OMO sales, we do not expect liquidity to tighten next fortnight", the commentary said. It added that interest rates seems headed southwards, but there could be occasional periods of temporary tightness.

The commentary said the bond markets have been on a roll this fiscal with the yield curve declining by nearly 65 basis points at the five year and 50 basis points at the 10 year segement. "Fresh issuance of government stock has been concentrated at the long end (weighted average maturity has been 12.4 years) and market appetite has built up for these securities. This can be seen from the fact that there has been no devolvement on RBI in the auctions for dated securites and most of the stock privatly placed with RBI has been susequently offloaded through OMO sales", the commentary said.

According the debt market update, the main factors to watch over the next few months will be liquidity, inflation and inflationary expectations, currency stability and balance of payment, and lastly liquidity crisis due to Y2K at the end of the year.

According to I-Sec, the liquidity is expected to be easy till the end of the fiscal year with net inflows from the the government to the banking system amounting to Rs 16,000 crore.With the CRR cut, inflows to the tune of Rs 24,000 crore can be expected which can take care of the extra borrowing due to any fiscal slippage, the debt market update said.

The report said that inflation is unlikely to cross 6 per cent by the end of the fiscal which is unlikely to lead to monetary tightening. "Inflationary expectations of 6 per cent also means that the real rate of interest of about 6 per cent, close to the level in developed countries", the commentary says.

I-Sec expects, FIIs inflow to pick up next quarter on the back of higher allocations for Asia and improved economic prospects for India which likely to lead to a comfortable BoP position. This is despite a rise in international oil prices which had resulted in a wider trade deficit in the current fiscal. "However,inflow on the invisibles account (software exports and remittances) is expected to be higher than last year", the report said.