I-sec reports, "The ways and means advances to the Central government stood at Rs 417 crore for the week ending February, 23. However, a senior finance ministry official reportedly indicated, that the WMA balance fell below Rs 200 crore on February 26 and that the government may resist borrowing from the market before mid-march. Adjusting for coupon and redemption payments since then and for salary and pension payments made last week, we expect the WMA balance to be tested. Thus, we can not rule out the possibility of a Gilt issuance this week."

"Budget expectations of market participants exceeded, resulting in a strong rally in gilts as expectations of a further bank rate cut intensified.

Yields fell by 30-35 basis points across the yield curve. However, there was strong selling pressure, after the anticipated bank rate cut materialised and participants booked profits. Yields have since retraced almost to pre-budget levels.

The popular 11.30 per cent 2010 security is currently at Rs 108.45, or 9.90 per cent. Overall, the yield curve has shifted downwards by 15-20 basis points from last week's levels." I-sec said.

I-sec stated that as was widely expected, RBI responded by cutting the bank rate by a further 50 basis points on March 1, after `a further review' of developments in the international and domestic financial markets. This facilitates the transition to lower lending and borrowing rates in the country.

"Money markets continued to be flush with liquidity last week. Average unavailed refinance stood around Rs 3,500 crore, while repo subscriptions averaged Rs 5,830 crore. Further call money rates were steady at 25-50 basis points, spread over the bank rate for most of the period and have fallen to 6.9-7 per cent currently", I-sec said.

There are coupon and redemption inflows of only Rs 750 crore (net of T-bills) in the current week. Further, the second half of the current reporting fortnight would see greater product coverage by banks. However, even after taking these factors into cognisance, I-sec believe that liquidity is unlikely to tighten significantly and that call rates would be in 7-8 per cent range this week.

As the most positive expectations have translated into reality, I-sec do not foresee a sharp rally from current levels. At the same time, in view of the sharp reduction in administered rates recently - which are akin to a structural shift to a lower interest rate regime - and the seven per cent refinance rate, I-sec believe that the downside is limited at the long-end.

Given this stable outlook, I-sec continue to stay invested in liquid securities in the medium-to- long segment towards a largercarry.