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Informist, Tuesday, Aug. 4, 2026

 

MUMBAI – Government bond prices are seen higher and overnight indexed swap rates are seen lower, tracking an overnight fall in crude oil prices after comments by US Treasury Secretary Scott Bessent fuelled hopes of a US-Iran deal. However, price action is likely to remain muted as traders avoid taking fresh positions ahead of Reserve Bank of India Governor Sanjay Malhotra's monetary policy statement at 1000 IST. 

 

Traders and economists almost universally expect the rate-setting panel to retain the policy repo rate at 5.25%, with June data showing retail inflation remained well within the RBI's 2-6% target band. The policy stance is also seen being retained at 'neutral'. The governor's comments on growth, inflation, and liquidity management are expected to lend cues to gilt prices during the day as traders gauge whether the MPC would set the stage to hike the repo rate from the current 5.25% starting October. Retail inflation is expected to remain above 5% starting in August. The pressure on the RBI to tighten monetary policy is expected to mount later in the year, as the US Federal Reserve is likely to increase policy rates in 2026, with a tightening interest rate differential pressuring the rupee. 

 

Traders expect the rate-setting panel to hold the repo rate steady, with most expecting a unanimous vote. A split in voting in favour of a rate hike could push up swap rates, dealers said. Traders expect the MPC to retain its 'neutral' stance, with some expecting a split in the voting pattern on the stance, for a shift to 'withdrawal of accommodation'. Most traders expect the RBI's CPI and GDP forecasts to be unchanged, while some expect a raise in GDP estimates and some expect a cut in CPI prints. Traders expect the RBI to conduct variable-rate reverse repo operations since systemic liquidity is likely to remain ample for the next couple of weeks, but the central bank is likely to refrain from conducting measures to drain durable liquidity this month at least, they said.

 

On Wednesday, the one-day interbank call money rate is seen near the RBI's repo rate of 5.25% as traders await RBI Governor Sanjay Malhotra's monetary policy statement at 1000 IST.

 

GOVERNMENT BONDS

Gilt prices may open higher after US Treasury Secretary Scott Bessent told CNBC that a deal with Iran for open navigation of the Strait of Hormuz may be signed by Tuesday or Wednesday. Following the comments, Brent crude futures fell to a three-week low under $81 per barrel, which is likely to reduce fears of imported inflation and potential rate hikes in India later in 2026-27 (Apr-Mar), dealers said. Any further developments on the geopolitical front during the day would also be keenly watched. Some traders may avoid aggressive bets before RBI Governor Sanjay Malhotra's statement on the MPC's decision. The 10-year benchmark 6.94%, 2036 bond ended at INR 100.87, or 6.8152% yield.

 

OIS RATES

On Wednesday, swap rates are seen opening largely steady before the RBI governor presents the monetary policy. However, an overnight fall in Brent crude oil prices could lead to swap rates opening lower. Post-market hours Tuesday, US Treasury Secretary Scott Bessent said that a US-Iran deal to open free access to the vital Strait of Hormuz is likely Tuesday or Wednesday.  

 

The one-year swap rate could fall around 10 basis points if the MPC keeps the repo rate and stance unchanged, dealers said. However, the focus would also be on whether the RBI revises its FY27 GDP growth and CPI inflation forecasts or keeps them unchanged. If swap rates rise due to the RBI governor opting for a 'hawkish' or restrictive tone in commentary, effectively setting the stage for rate hikes, some domestic and foreign banks' asset and liability managers could step in to receive fixed rates, while some fund-raisers could receive rates to hedge their bond issuances, dealers said. However, with such commentary, offshore traders could step up paying interest in swaps, dealers said. 

 

The view on the steepening or flattening of the swap rate curve will hinge on the RBI's commentary on liquidity, with some expecting the RBI to announce measures or provide commentary on draining excess surplus rupee liquidity, due to hefty inflows through foreign currency non-resident bank deposits. The foreign inflows are likely to keep the shorter-end of the swap rate curve anchored due to the liquidity boost, while some traders may receive the longer-term swaps to deploy the flows. "One can't fight the (foreign) flow. If money is coming in, then they will have to deploy it somewhere, either in OIS or bonds and even if macro is different, OIS will see receiving," a dealer at another private sector bank said.  

 

The movement of the rupee and overnight borrowing rates will also lend cues. The one-year swap rate is seen in the range of 5.70-6.15% and the five-year at 6.15-6.50%. The one-year swap rate closed at 5.87%. The five-year swap rate ended at 6.36%.

 

CALL

On Wednesday, the one-day interbank call money rate is seen near the RBI's repo rate of 5.25% as traders await the monetary policy statement. Traders expect the Monetary Policy Committee to keep the repo rate unchanged at 5.25% while retaining the policy stance at "neutral". However, some traders expect the governor's statement to set the stage for drawing out excess liquidity, beginning with variable-rate reverse repo operations as early as this week. Traders do not expect measures to drain durable liquidity such as a hike in the cash reserve ratio or RBI sales of government bonds yet. A few dealers speculate a dollar-rupee sell-buy swap.   

 

If the policy rate is left unchanged and the RBI does not provide commentary on liquidity-draining measures, the overnight borrowing rates are likely to slide to near the SDF rate by the end of the session on low demand for funds amid lack of major outflows, dealers said. Surplus liquidity is seen remaining comfortable due to inflows from foreign currency non-resident bank deposits, dealers said. Dealers expect the call rate at 4.60–5.55% Wednesday. The tri-party repo rate is expected to be in the 4.60–5.40?nd. The weighted average call rate is expected to be in the 5.00–5.25?nd, and that in the tri-party repo market is likely to be similar, they said. The one-day call money rate ended at 4.60% Tuesday. The weighted average call rate was 5.06%.

 

RBI AUCTION

--RBI to auction 91-day T-bills worth INR 90 billion

--RBI to auction 182-day T-bills worth INR 80 billion

--RBI to auction 364-day T-bills worth INR 70 billion

 

LIQUIDITY

Total net outflows of INR 159.30 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 28.50 billion as coupon on state bonds

--INR 585.60 million as coupon on 6.90%, 2034 green bond

--INR 52.47 billion as coupon on 7.09%, 2054 gilt 

 

* Outflows

--INR 240.86 billion as payment for state bonds

 

End

 

US$1 = INR 95.3775

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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