With the bank rate and repo rate cuts by the Reserve Bank of India, gilt yields are likely to realign at lower levels, the I-Sec report said. The upside at the long-end of the yield curve has been capped by the RBI open market operations (OMO) yields of 11-year security at 12.5 per cent.The potential upside in ten-year gilts appeared to be at least 40-50 basis points, said the I-Sec's debt markets update, released on Wednesday.

The maximum upside in price terms appears to be in the three to five year securities, the report said. The current RBI open market operations price list has been used as a benchmark for the year-end projections, in particular at the long end. There is potential for further upside if the the OMO prices are revised, the report said.

The lower call money rates would translate into lower yields for liquidsecurities in the below five year segment. "We expect yields on 91-day treasury bills to decline to 8.75 per cent, 364-day treasury bills 10 per cent, two-year securities to 10.85 per cent, three-year to 11.30 per cent and 10-year to 12.10 per cent by the end of the year," I-Sec said.

Among the liquid securities, the investment bank expects 11.40 per cent, 2000 security to appreciate to 10.7 per cent yield, 11.55 per cent 2001 security to 11 per cent yield, 11.68 per cent 2002 to 11.30 per cent yield, 12.5 per cent 2004 to 11.65 per cent yield and 12.25 per cent 2008 to 12.05 per cent yield.

The report further said that the banks would be adversely affected by the budget in two ways. First, the deposit collected by the banking system would suffer, as the saving deposits shift towards mutual funds to take advantage of these tax breaks. Second, the banks themselves cannot invest in mutual funds beyond five per cent of the incremental deposits of the previous year limiting them from routing their investmentto gain the tax advantage.

With all open-ended equity funds and US-64 exempt from dividend tax and lowering of tax to 10 per cent for other open-ended funds would adversely affect the banks, said the report.The budget proposal makes it attractive to route all investments through mutual funds as the tax differential between direct investments in bank deposits and investments routed through mutual funds would be 28.5 to 38.5 per cent, I-Sec said. The post-tax interest rate structure has moved up, and this would result in an increase on instruments not getting this benefit, it said. On the fiscal deficit, the report said the deficit of the central government for 1999-2000 has been budgeted at Rs 79,955 crore.