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Informist, Thursday, Aug. 6, 2026

MUMBAI – Government bond prices will track the result of the INR-320-billion government bond auction Friday, dealers said. Bonds and swaps will also closely track developments in West Asia and their impact on crude oil prices and US Treasury yields, dealers said. 

Demand for the INR-210-billion supply of the 6.36%, 2031 bond is expected to be robust as asset-liability managers add these bonds to their portfolios to deploy FCNR(B) deposits. The INR-110-billion auction of the benchmark 7.71%, 2066 gilt is also expected to see demand from life insurers and pension funds, as its yield is higher than at the previous auction, which should allow the supply to sail through, dealers said.

On Friday, the three-day interbank call money rate is seen near the Reserve Bank of India's repo rate of 5.25%, with demand for funds ahead of the weekend, dealers said. Some traders expect the RBI to conduct a second variable rate reverse repo auction this week, as overnight borrowing rates still traded near the Standing Deposit Facility rate despite the VRRR on Thursday, even as the weighted average rates rose. Systemic liquidity could potentially increase Thursday due to inflows through foreign currency non-resident bank deposits which were swapped with the RBI Tuesday, dealers said. However, this could be partly offset by outflows for excise duty and tax deducted at source of about INR 600 billion, which will take place till Monday, they said. 

GOVERNMENT BONDS

On Friday, gilt prices may take direction from the developments in the West Asia war and their impact on crude oil prices and US Treasury yields, dealers said. The impact may be limited before the INR-320-billion gilt auction at 1030-1130 IST, they said.
 

Government bond prices are likely to open higher if Brent crude oil prices are below $80 with no escalation in the West Asia war, dealers said. However, the rise in bond prices will likely remain limited due to profit sales by state-owned banks near 6.75% yield on the 10-year benchmark gilt. On the other hand, adverse headlines may lead to sales from traders and purchases from large banks, dealers said.

The 6.94%, 2036 bond's yield is seen between 6.73-6.82% Friday. Any significant movement in the rupee and swap rates will also lend cues, dealers said. The 10-year benchmark 6.94%, 2036 bond ended at INR 101.21, or 6.7666% yield.

OIS RATES

On Friday, swap rates are seen little changed unless crude oil prices shift significantly overnight. Several traders are shifting to paid bets with swaps unlikely to ease with elevated US Treasury yields, even as commentary by the Reserve Bank of India indicates no urgency to opt for a rate hike domestically, dealers said. Banks which were receiving fixed rates due to FCNR(B) deposits may reduce the pace of receiving, they said. However, foreign banks are still seen receiving fixed rates due to foreign inflows through these deposits, dealers said. Some fund-raisers could receive rates to hedge their bond issuances if swap rates rise, dealers said.

The view on the swap rate curve is still seen mixed, with expectations of both steepening and flattening. Due to hefty inflows through foreign currency non-resident bank deposits, the shorter end of the swap rate curve could be anchored by the liquidity boost, while some traders may receive longer-term swaps to deploy the flows. The movement of the rupee and overnight borrowing rates will also lend cues. The one-year swap rate is seen in the range of 5.65-6.10% and the five-year at 6.07-6.40%. The one-year swap rate closed at 5.77%. The five-year swap rate settled at 6.27%.

CALL

On Friday, the three-day interbank call money rate is seen near the RBI's repo rate of 5.25%, with demand for funds ahead of the weekend, dealers said. Some traders expect the RBI to conduct a second VRRR this week as overnight borrowing rates still traded near the SDF rate despite the VRRR Thursday, even as the weighted average rates rose. Systemic liquidity could potentially increase Thursday due to inflows through foreign currency non-resident bank deposits which were swapped with the RBI Tuesday, dealers said. However, this could be partly offset by outflows for excise duty and tax deducted at source of about INR 600 billion, which will take place till Monday, they said. 

RBI Governor Sanjay Malhotra Wednesday acknowledged that current surplus liquidity conditions will be short-lived, and hence erased expectations of the RBI bringing measures to absorb durable liquidity. However, some traders still expect measures to drain durable liquidity such as a hike in the cash reserve ratio or RBI sales of government bonds by October. Traders are pricing out expectations of a hike in the repo rate in October after mildly "dovish" commentary Wednesday. 

Surplus liquidity is seen remaining comfortable due to inflows from foreign currency non-resident bank deposits, dealers said. Dealers expect the three-day call rate at 4.60–5.30% Friday. The three-day tri-party repo rate is expected to be in the 4.60–5.25% band. The weighted average call rate is expected to be in the 5.10–5.25% band, and that in the tri-party repo market is likely to be similar, they said. The one-day call money rate ended at 5.00% Thursday. The weighted average call rate was 5.18%.

RBI AUCTION

--Govt to auction two gilts worth INR 320 billion

LIQUIDITY

Total net inflows of INR 36.61 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 26.61 billion as coupon on state bonds

--INR 10.00 billion as redemption of state bonds 

* Outflows

--Nil

End

US$1 = INR 95.22

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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