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Informist, Monday, Jul. 13, 2026

 

MUMBAI – Government bond prices are seen falling and overnight indexed swap rates rising Tuesday, tracking a rise in crude oil prices after US President Donald Trump said after Indian market hours that the US is reinstating a blockade on Iranian vessels through the vital Strait of Hormuz. 

 

However, many dealers view the current rise in crude oil prices as short-lived, as evidenced by strong purchases of gilts by state-owned banks on Monday, despite a flare-up in the conflict over the weekend. Largely, the rise in crude oil prices has been contained, boding well for gilt prices in the longer run, they said.

 

After the June CPI inflation was in line with expectations, traders do not expect a rate hike in India in August or October, limiting a rise in yields, they said. However, with food inflation topping 5% last month, some traders expect the Reserve Bank of India to adopt a more restrictive tone going forward, with some anticipating a stance change by the Monetary Policy Committee in October. 

 

Traders will also track movement in US Treasury yields and inflows from the Reserve Bank of India's measures announced last month to shore up capital, dealers said. Several bankers have said that inflows from foreign-currency non-resident bank deposits have so far been below expectations. Systemic liquidity will also be in focus, with the RBI's dollar sales in the foreign exchange spot market likely to have drained rupee liquidity this week. 

 

On Tuesday, the one-day interbank call money rate is seen at or above the RBI's repo rate of 5.25% as funds are expected to remain tight amid initial public offerings and high credit growth, which is at a two-year high, according to the latest data, dealers said.

 

GOVERNMENT BONDS

On Tuesday, traders will track Brent crude oil prices and US Treasury yields at the open. Traders are not pricing in a rise in Brent crude above $80 per barrel, dealers said. Any escalation in the war in West Asia would pull down prices and push the yield on the 10-year benchmark bond to 6.80%, dealers said.

 

Domestically, the focus will be on any news regarding the inclusion of Indian gilts in Bloomberg's flagship index and foreign capital inflows following measures announced by the RBI last month. Most traders expect an inclusion, though some technical difficulties for foreign portfolio investors purchasing bonds persist, dealers said. The depreciation of the rupee against the dollar is a concern for some traders, as the fall comes despite the RBI deploying various measures to prevent it. 

 

Traders will also track monsoon rainfall, as deficient southwest monsoon rainfall will contribute to higher inflation, they said.

 

The 10-year 2036 bond is seen moving between 6.68% and 6.78%, with 6.78% seen as the next crucial level for the gilt on the upside, with some dealers betting on a fall to 6.68% on the downside, dealers said. The 10-year benchmark bond ended at INR 101.47, down from INR 101.60 Friday but off the day's low of INR 101.40. The yield on the bond rose to 6.7309% from 6.7139% at the end of the previous session.

 

OIS RATES

On Tuesday, OIS rates will take cues from movements in crude oil prices and US Treasury yields, dealers said. A sustained escalation in the conflict may lead traders to reassess their view that the repo rate in India will not be raised until December, with some already fearing a 25-basis-point increase by October. 

 

The last CPI inflation reading before the MPC's August meeting was in line with expectations but showed price pressures building and likely to increase in the coming months, dealers said. CPI inflation rose to 4.38% in June from 3.93% in May. With food and fuel prices driving retail inflation higher, traders are now reassessing their view on domestic interest rates. The MPC is likely to be influenced both by the durability of the re-emerging conflict in West Asia and the US Federal Open Market Committee's rate decisions, dealers said. 

 

Deficient rainfall and higher food prices may push up retail inflation in the coming months, while the RBI is likely to drain systemic liquidity ahead of a likely rate hike cycle, dealers said. This will limit a further fall in OIS rates, especially with the US FOMC expected to increase its policy rate in 2026.

 

Traders await Bloomberg's decision on the inclusion of Indian gilts in its flagship index, with most traders betting on a favourable decision. Traders also expect overnight rates to ease due to a liquidity boost from inflows into foreign-currency non-resident bank deposits. The Bloomberg announcement on the inclusion of Indian bonds is expected any time from next week to as late as September, dealers said. 

 

The movement in the rupee could also lend cues. The one-year swap rate is seen in the range of 5.70-5.95% and the five-year at 6.06-6.35%. The one-year swap rate closed at 5.83%, up from 5.77% Friday. The five-year swap rate ended at 6.24%, rising from 6.17% Friday.

 

CALL

On Tuesday, the one-day interbank call money rate is seen at or above the RBI's repo rate of 5.25% as funds are expected to remain tight amid initial public offerings and high credit growth, which is at a two-year high, according to the latest data, dealers said. Traders will continue to gauge the liquidity drain from the RBI's intervention in the spot rupee market. 

 

The outlook for inflows through the RBI's measures to shore up capital is hazy, with several banks yet to finalise their leverage schemes for foreign-currency non-resident bank deposits, and some fundraisers refraining from overseas borrowing due to high spreads amid large supply. Systemic liquidity is expected to improve if foreign-currency non-resident bank deposits accelerate. Banks hedging deposits under the central bank's concessional swap window will gain rupee liquidity, potentially easing money market rates, dealers said. Dealers expect flows to pick up pace by the end of this month. State Bank of India economists estimate current flows through these deposits at $8-$9 billion.

 

Dealers expect the call rate to be at 4.60–5.40% Tuesday. The tri-party repo rate is expected to be in the 4.90–5.20?nd. The weighted average call rate is expected to be in the 5.20–5.30?nd, and that in the tri-party repo market is likely to be in the 5.10–5.20?nd, they said. The one-day call money rate ended at 5.30% Monday, slightly lower than 5.35% for three-day loans Friday. The weighted average call rate was 5.30%, down from 5.35% Friday. 

 

RBI AUCTION

--Nine states to raise INR 248 billion via bond sale

 

LIQUIDITY

Total net inflows of INR 86.47 billion. The calculation of flows does not take into account redemption of the standing deposit facility and scheduled variable rate repo and variable rate reverse repo operations.

 

* Inflows

--INR 20.02 billion as coupon on state bonds

--INR 5.00 billion as redemption of state bonds

--INR 44.18 billion as coupon on 7.26%, 2029 gilt 

--INR 17.27 billion as coupon on 6.28%, 2032 gilt

 

* Outflows

--Nil

 

End

 

US$1 = INR 95.6200

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Cassandra Carvalho

Edited by Saji George Titus

 

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