US-Iraq war fears may affect the sentiments in gilts market despite India's strong fundamentals and smooth sailing of  the government's market borrowing now at Rs 1,34,036 crore (Rs 1,340.36 billion), PNB Gilts warned on Monday.

"There could be periods of volatility on account of rising inflation numbers, Union Budget, year-end profit booking by the players and possible Iraq war. Despite strong fundamentals, the event risk of a US-Iraq war is likely to impinge on market sentiment in the next week," PNB Gilts said in a report.

In the medium term, it said the outlook of the gilts market continues to be positive on the back of strong forex inflows now at over $72 billion, low inflation rate of 3.72 per cent with the Reserve Bank of India committed to keep interest rates soft.

The Centre has completed 94 per cent of its gross market borrowing, while RBI sold Rs 11,000 crore (Rs 110 billion) worth of securities in the largest ever open market operation during last fortnight.

The government auctioned treasury bills worth Rs 1,000 crore (Rs 10 billion) during the last fortnight, completing Rs 1,34,036 crore of gross borrowing as against the budget estimate of Rs 1,42,867 crore (Rs 1,428.67 billion), PNB Gilts said, it was significantly higher than Rs 1,22,500 crore (Rs 1,225 billion) raised during the same period last fiscal.

After redeeming securities worth Rs 43,799 crore (Rs 437.99 billion), the government's net borrowing was at Rs 90,237 crore (Rs 902.37 billion), which was 93 per cent of Rs 95,859 crore (Rs 958.59 billion) targeted for this fiscal.

"RBI announced the largest ever Open Market Operation intervention of Rs 11,000 crore," PMB Gilts said, adding the apex bank's OMO sales went up to 53,505 crore (535.05 billion) during this fiscal as against Rs 30,270 crore (Rs 302.7 billion) during the year-ago period.