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Sanjiv Shankaran

THE last couple of months have seen a sharp rally in the prices of

government securities (gilts). Following the rally, the yields on gilts dipped to a historic low a few weeks ago. In early January, the rally in gilts lost a bit of steam, and the yields hardened a little.

The equity share price of PNB Gilts has mirrored the trend in gilts prices. Since August 2002, the share price moved up by about 41 per cent to trade around Rs 26 now. One good reason for the trend in stock is that PNB Gilts relies largely on trading in gilts to drive its profit. An occasion for a big rally in gilts is likely to show up in the profit of PNB Gilts. For instance, in the quarter ended December 2002, the company registered a 86 per cent rise in profit after tax (PAT) compared to the corresponding previous period.

Another reason for the upward movement in the stock could have been the company's interest in bringing in a strategic partner from overseas — now, about 78 per cent of the company's equity is with the promoter, Punjab National Bank. In this backdrop, it may be a good time to re-visit the investment potential of PNB Gilts' equity.

It may be time to book profit in the stock (Business Line recommended an investment in August 2002). Early indications suggest that the large rally witnessed in the gilts market after the last Credit Policy may be losing steam. The key drivers for the rally in gilts were the huge liquidity, expectations of a repo rate cut and the low forward premium in the foreign exchange market.

Even now, liquidity remains high and conditions largely unchanged in the foreign exchange market. But the RBI's actions during the rally suggest that the central bank may intervene to check a further dip in yields. In short, the RBI does not seem too comfortable with a bigger drop in yields.

As after a rally, there has been some cooling off. Expectations, that played an important role in the last rally, are likely to change a bit. A bit more scepticism among market participants may creep in.

There is always the shadow of political turmoil in West Asia to consider. The political situation there is fraught with uncertainty. That, in turn, may play a larger role in driving expectation in the gilts market.

As for overseas investors, it may be prudent to avoid too much of speculation in this area. A statement of intent is one thing (good for a small rally), but it may be better to wait for tangible developments before reaching a firm conclusion.

PNB Gilts' share price trend has a strong correlation with the gilt markets' trend. Therefore, it may be time to book profit.

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