As gilts prices appreciate, gilt fund NAVs are firming up. But is this going to be sustainable?

The last few days have witnessed a rise in (government securities) gilt prices. The rise in gilt prices is a direct fallout of the low interest regime signaled by the lending and borrowing operations of the central bank. The central bank in a series of transactions has reduced the repo rates, which triggered a rise in gilt prices.

Open-ended, Gilt Funds	NAV (Rs)	Last week	Last month	Last year	Since inception
Chola Gilt (2003)(Gr)	10.33	0.50%	1.10%	0.00%	2.00%
K Gilt Serial 2005 (Gr)	9.97	0.50%	2.00%	0.00%	-0.30%
Tata Gilt Sec. B (App)	11.44	0.40%	1.00%	0.00%	14.20%
Templeton Govt Sec (Gr)	11.65	0.40%	1.10%	13.10%	13.40%
K Gilt Serial 2003 (Gr)	10.98	0.40%	1.40%	0.00%	9.70%

(The above table only shows gilt funds with over 0.4% rise in last week)

The moot point is whether RBI can sustain this buying at lower rates. Rising crude prices are a concern and inflationary pressures are rising (although the headline inflation rate has declined in recent weeks, the medium term trend is definitely indicating higher rates). In view of this, higher gilt prices could well be a temporary phenomenon and the situation could reverse in a few weeks time, in which case gilt fund NAVs could be seen heading downhill.

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