According to the report, the recent softening in international crude oil prices will help keep fiscal deficit at its current level. Also, the rise in India's reserves to over $39.5 billion, a comfortable liquidity situation, reduced bond issuance frequency, and softening in international crude oil prices, have been the main factors behind the improved market sentiment, the report added.

The yield on the benchmark 10 year government bond has declined nearly fifty bps in the past three months to 11.12 per cent. The medium-term bonds have outperformed the near and longer maturity by a large margin. However, profit taking at higher levels may see bond prices ease down in the next fortnight. The drop in bond prices next fortnight may be seen as an opportunity to increase long positions, suggested the report. Globally, most of the central banks are expected to keep interest rates soft in the new year, according to the report. This will have an impact on India, as, according to the RBI governor Bimal Jalan, the rise in global interest rates was the main reason for RBI's rate hike in July. In the overnight call money market, the interbank call money rate is expected to remain volatile, given the advance tax outflow next week. The amount of refinance drawn has also increased during the month from Rs 2,500 crore to Rs 10,000 crore.

The outflow on advance tax outflow would strain liquidity which might push the call rate to double digit mark, the report added. Steady overnight rates through most part of the fortnight helped to keep treasury bill auction yields more or less stable during this period. Notably, the 364-day treasury bill auction saw good bidding interest (Rs 1,477 crore bid, one of the highest seen this year) with the cut-off yield easing 7 bps to 10.07 per cent for an increased auction size of Rs 750 crore.

Comfortable liquidity and relatively soft overnight rates pushed down secondary market T-bill by roughly 10 basis points at the long end (six months) of the T-bill curve.