According to J P Morgan Guaranty, foreign institutional investors (FIIs) have brought in $ 750 million including global depository receipts (GDRs) while FDI inflows have been more than $ 500 million since January. The dollar inflows is extremely strong at $ 2.8 billion with external commercial borrowings (ECBs) contributing $ 1.5 billion.

The foreign exchange assets of the Reserve Bank increased by $ 2.6 billion since the beginning of the year and the rupee remained more or less stable despite the extended period of political uncertainty which led to the collapse of the Union government. Dollar purchase by the Reserve Bank kept the supply of rupee comfortable in the market and this, apart from enabling the Reserve Bank to complete 30 per cent of government's gross borrowings, have actually resulted in a decline in interest rates sincelast month.

Attributing the reason of strong foreign exchange inflows to a certain extent a spill over from the turnaround in sentiment towards South-East Asian region, the J P Morgan report says, these developments have increased the risk appetite of the market as reflected in the shift to higher dural assets.

Over 80 per cent of the borrowings this year have been for 10 years or more and even trading interest in the secondary market has shifted to the long end of the yield curve. While the Reserve Bank has managed liquidity very effectively, the improved sentiment is unlikely to reverse in the short term. As far as ECBs are concerned, there is a pipeline of over $1.5 billion of approvals which could result in inflows in the near future.

There are still no clear signs of an industrial recovery and anyway investors would prefer to postpone their investment decisions till after the elections. As a result, the banking sector is unlikely to see a sharp increase in credit demand for the next couple ofmonths. Even bond issues from the institutions are much lower than in the previous year.

Therefore, J P Morgan paper feels, the government securities are expected to remain well bid with a clear bias towards yields softening further from current levels over the next two to three months.