The government security issuances have been markedly higher this year to compensate for the lower amounts raised through 364-day treasury bills, said Morgan Guaranty Trust Company's weekly report ``Indian Markets Outlook'' released on Thursday.

Devolvement on the RBI and primary dealers (PDs) this year has been over five times as much as it was last year, a clear indication of the weaker market sentiment. The ratio of bid amount to amount accepted at security auctions was 2.13 times last year compared with 1.58 times this year.

The lower ratio this year implies that the RBI has had to accept a larger proportion of bids received at auctions in order to fill the notified amount, the report said.

The difference between cut-off yields and weighted average yields at securityauctions has narrowed from 5 basis points in 1997-98 to 2 basis points in the current year. More than finer pricing by the market, this brings out the different bidding strategies followed by the market.

Last year, the bidding pattern has been very aggressive with players committing large amounts at the lower end of their bidding band in order to ensure success at the auction even if it meant paying a premium for the stock.

Conversely, this year most of the bidding (which itself has been relatively low) has been at the higher end of the band to get as close to cut-off as possible.

The first two-year government security auctioned this year received a discouraging response despite huge surplus liquidity and primary dealers were required to take a devolvement of Rs 207 crore. The RBI received 138 bids for Rs 3,703 crore of which 125 bids were accepted for Rs 2,793 crore at a weighted average yield of 11.36 per cent.

The short end (one year) of the curve has hardened by 150 basis points, medium end (fiveyears) by 40 basis points and the long end (10 years) by about 15 basis points since the beginning of the year.

In price terms, the drop at the medium and short end has been Rs 1.50 while the long end has reacted by about 65-70 paise. With chances of an early reversal of the repo rate and banks' cash reserve ration (CRR) hike slim, the ripple effect of high short-term rates is bound to be felt at the long end of the curve, which could harden by another 20-30 basis points by the end of calendar year 1998, the report said, adding "we are likely to see a steepening of the yield curve between the medium and long end in the second half of the year."

Secondary market volumes have dropped this year averaging Rs 446 crore per day compared with Rs 478 crore last year. After taking into account Rs 9,000 crore of open market sales by the RBI, genuine inter-bank trades would be lower at Rs 380 crore per day.

Morgan has also said interest rates will move up in the second half of 1998-99. The view is based on thenumber of constraints like widening fiscal deficit, spurt in money supply and inflation that the RBI would have to deal with in the second half.

Long- and medium-term interest rates are expected to start moving up in the coming days. According to Morgan, the sharp upward movement in the short-term interest rates during the last six months will now spill over to the medium and long term rates.