The current spurt in prices appears to be based on hopes of monetary easing in the future. Apart from that of a bank rate cut, rumours of a relaxation in the cash reserve requirements for banks and the restoration of export refinance limits has abounded, said the weekly study.

The gilts prices dipped early last week amid concerns of an impending gilt issuance and a confusion over the statements reportedly made by the Reserve Bank of India, governor.

However, the prices bounced back on optimism that the central bank could take monetary measures to provide an impetus to economic growth. Despite the high call money rates, bond yields continued to dip the benchmark 10-year yield, currently at 10.64 per cent and is at its lowest level in six and half months.

The rupee is strengthening against the dollar and if, as is widely expected, the US fed cuts rates further at its next meeting on January 30-31, 2001, RBI will gain additional flexibility to reduce domestic rates.

I-Sec expects two gilt securities, the 12.25 per cent 2010 security for an amount of Rs 2,500 crore and the 12.30 per cent 2016 security for an amount of Rs 1,500 crore through price-based auctions on Monday to be priced at a spread over their popular neighbours, the 11.30 per cent 2010 and 11.45 per cent 2015 securities respectively. Illiquidity risk will also be a factor and the market interest could be impacted by existing positions at the long-end of the yield curve, noted I-Sec. However, current bullish sentiment could over-ride these concerns and result in higher that expected cut-off prices at the auctions. Thus, we expect call money rates to remain tight in the current week, capped by the cut-off rate at RBI's reverse-repo auctions.

Considering coupon payments of around Rs 1,100 crore in the period January 6 to 20 January (net of T-bills) and auction inflows of Rs 4,000 crore, there is a little likelihood of additional gilt issuance this week, the report said.

As liquidity is expected to be right this week and the road to a rate cut may be a fairly long one ,price risks at the extreme long end are quite high.``Therefore, we cut our exposure at the long-end of the yield curve and revert to an equitably distributed portfolio,'' said the I-Sec report.