While this is lower than the 7 per cent fiscal deficit projected by Claude Smajda, chief of the World Economic Forum, I-Sec is far less optimistic about meeting the targeted deficit of 5.6 per cent of GDP set by finance minister Yashwant Sinha.

``Fiscal deficit appears set to overshoot the targeted Rs 91,025 crore (5.6 per cent) by at least Rs 15,000 crore. This is a result of the shortfall in indirect tax collections as well as a likely shortfall in the disinvestment target,'' I-Sec said in its report.

The ICICI subsidiary has said that the shortfall in customs is expected to be Rs 6,648 crore and excise at Rs 6,690 crore while income tax collection might exceed the target by Rs 70 crore and corporation tax byRs 1,450 crore. ``With equity markets continuing to be sluggish, the disinvestment target could also be affected. Against the budgeted Rs 5,000 crore for the fiscal, Rs 225 crore has been raised,'' it said.

Last year, the fiscal deficit exceeded the target by Rs 20,891 crore. This was mainly through excess small savings collections and additional market borrowings. The higher budget for small savings, among other things, this year provides little leeway and most of the fiscal slippage would need to be funded from additional market borrowings, the report said.

I-Sec has further predicted that the RBI would keep short-term rates on the higher side. ``The recurrence of volatility in the forex markets leads us to believe that the RBI would prefer to maintain high short-term interest rates. Hence, we believe that the repo rate is not likely to be lowered during December,'' the debt market update said.

The ICICI investment banking arm, however, expects liquidity to tighten with the next instalment of advancetax collections due during the next reporting fortnight. ``Moreover, with the likelihood of a repo rate cut diminishing, cut-off rates appear to have bottomed out for primary issuances of treasury bills,'' the report said.

However, with a net inflow of Rs 1,000 crore expected in the remaining part of the current reporting fortnight and with Rs 5,325 crore of repos outstandings, the overall liquidity appears comfortable. ``The next instalment (30 per cent the full year's dues) of advance tax is due on December 15 and this is likely to suck out liquidity toward the end of the next reporting fortnight,'' I-Sec said.

It went on to add that considering the advance tax outfow, an auction in the next fortnight would add to the tightness. However, the main risk to the bond market is the possibility of continued volatility in the forex markets leading to the RBI sucking out short-term liquidity.