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Informist, Monday, Jul. 20, 2026

 

MUMBAI – Government bond prices are seen rising and overnight indexed swap rates are seen lower Tuesday after data released by the Reserve Bank of India showed foreign inflows through the central bank's foreign exchange swap facilities were more than market expectations at $20.7 billion. However, the movement of these instruments will also depend on the movement of crude oil prices. 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.

 

Data released by the RBI showed that its schemes to attract foreign capital launched in early June had drawn inflows of $20.72 billion by Friday. Foreign currency non-resident bank deposits alone brought in $17.41 billion since the concessional swap window for banks was rolled out on Jun. 8, the RBI said. This may lead to traders stepping up purchases of short-term bonds in the coming days, while receiving the five-year OIS. 

 

Traders remain cautious about developments in West Asia and the movement of US Treasury yields closer to the US Federal Open Market Committee's meeting later this month. News regarding the inclusion of Indian gilts in Bloomberg's flagship index and foreign capital inflows following the measures announced by the RBI last month will also be tracked. Several traders have pushed back expectations of the Bloomberg review being published this month to August and even September.

 

Traders will also track the progress of monsoon rainfall, as deficient Southwest monsoon rainfall will contribute to higher inflation, they said. However, domestic inflation is largely in check as of now, dealers said, barring the imported inflation from a rise in oil prices. Traders now look to gauge whether the RBI's Monetary Policy Committee will raise the repo rate in October to curb inflation and stabilise the depreciating rupee. 

 

On Tuesday, the one-day interbank call money rate is seen above the RBI's repo rate of 5.25% and closer to the RBI's MSF rate of 5.50% due to outflows for goods and service tax payments, dealers said.

 

GOVERNMENT BONDS

On Tuesday, gilt prices will take cues from overnight developments in West Asia, especially the movement in crude oil prices, dealers said. Traders may cover short sales in the 15-year benchmark 6.68%, 2040 bond after the government said post-market hours that it would issue a new bond maturing in 2041 on Friday. The yield on the 10-year benchmark 6.94%, 2036 gilt is seen in a range of 6.73-6.84% Tuesday. 

 

However, traders remain unsure how the inflows have come in without a corresponding rise in rupee liquidity with banks, as they converted the funds using the concessional swap windows. The total inflow number suggests an increase in banking system rupee liquidity by nearly INR 2.0 trillion. Dealers also remain expectant of further flows on the view that Bloomberg will announce the inclusion of Indian sovereign bonds in its flagship Global Aggregate Index soon. 
 

The result of the state government bond auction Tuesday may lend cues in the second half of trade, dealers said. Twelve states will raise INR 217 billion at 1030-1130 IST Tuesday, against INR 225 billion indicated in the calendar for Jul-Sept. Banks and insurers would prefer picking up state bonds, which offer higher yields, for their investment portfolios, dealers said. The 10-year benchmark 6.94%, 2036 bond ended at INR 101.14, marginally up from INR 101.12 Friday, after falling to a low of INR 100.75 intraday. The yield on the bond ended at 6.7770% from 6.7799% at the end of the previous session.

 

OIS RATES

On Tuesday, swap rates will continue to track movements in crude oil prices and US Treasury yields, dealers said. Offshore traders are likely to continue paying fixed rate contracts if the conflict in West Asia persists. The developments in West Asia will also influence traders' views on domestic rate increases due to the potential impact on imported inflation.

 

The one-year swap rate is roughly pricing in nearly three repo rate hikes within 12 months. Traders will also keep a track of any received bets by domestic banks' asset and liability management, with aggressive flows from these desks having hit a pause amid a rise in crude oil prices.

 

However, on the domestic side, swaps could open lower after the RBI, post-market hours, released data on the foreign inflows received till Friday through the various schemes it had rolled out last month to shore up capital. This figure is much better than most traders were expecting, at $20.72 billion raised through foreign currency non-resident bank deposits, banks' overseas foreign currency borrowing and public sector undertakings' external commercial borrowing. Traders were expecting inflows of around $20 billion by the first week of August. 

 

The movement in the rupee could also lend cues. The one-year swap rate is seen in the range of 5.78-6.10% and the five-year at 6.25-6.52%. The one-year swap rate closed at 5.95%, inching higher from 5.93% Friday but off the day's high of 6.02%. The five-year swap rate ended at 6.41%, up from 6.38% Friday.

 

CALL

On Tuesday, the one-day interbank call money rate is seen above the RBI's repo rate of 5.25% and closer to the RBI's MSF rate of 5.50% due to outflows for goods and service tax payments, dealers said. Traders will also assess the drain on rupee liquidity due to the RBI's dollar sales in the foreign exchange spot market. The RBI likely intervened by selling about $2 billion Monday, according to dealers in the foreign exchange market. The RBI will conduct a three-day VRR Tuesday for INR 750 billion, which is what several traders were expecting. Traders expect the RBI to continue to hold VRRs until the Centre's month-end expenditure begins, with the systemic liquidity seen falling into a deficit this week.

 

"Liquidity can fall into a deficit tomorrow (Tuesday), so RBI will have to keep conducting VRRs until month-end inflows begin," a dealer at a state-owned bank said. 

 

Dealers expect the call rate at 4.60–5.50% Tuesday. The tri-party repo rate is expected to be in the 4.60–5.70?nd. The weighted average call rate is expected to be in the 5.25–5.35?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, up from 4.75% at two-day close Saturday. The weighted average call rate was 5.34%, up from 4.94% Saturday. 

 

RBI AUCTION

--12 states to raise INR 217 billion via bond sale

--RBI to hold three-day VRR auction for INR 750 billion 0930-1000 IST

 

LIQUIDITY

Total net inflows of INR 40 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 4.84 billion as coupon on state bonds

--INR 35.16 billion as coupon on 6.01%, 2030 gilt

 

* Outflows

--Nil

 

End

 

US$1 = INR 96.4450

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

 

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

 

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