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Informist, Saturday, Aug. 29, 2026

MUMBAI – Government bond prices are likely to fall and overnight indexed swap rates may rise after US Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole Economic Symposium Friday raised the spectre of the US Federal Open Market Committee hiking interest rates in 2026. Markets will also track developments in the war between the US and Iran and the consequent movements in crude oil prices.

The 10-year US Treasury yield bounced back to an over-one-week high of 4.73% by Friday's close and the two-year US yield jumped over 10 basis points to close at a one-month high of 4.36%. Warsh's comment that the Fed may have more "work to do" to fight inflation put a September rate hike back in focus. He also said there was little sign that borrowing and lending conditions were restraining the economy, and that better inflation readings in the American summer had not convinced him that the underlying trend was improving. Traders now see a roughly 57% chance of a rate hike at the FOMC's next meeting, up from 35% Thursday, according to the CME FedWatch data.

Movement in gilt prices and OIS rates may be subdued as traders remain cautious ahead of the release of India's GDP data for the June quarter. India's GDP growth is likely to have slowed to a one-year low of 7.2% in Apr-Jun amid supply-chain disruptions and higher commodity prices stemming from the war in West Asia, according to an Informist Poll of 14 economists. Stronger-than-expected growth may increase bets on a repo rate hike in India as early as October, while weaker-than-expected data may push back rate-hike expectations, dealers said.

The one-day call money rate is likely to open near the Reserve Bank of India's repo rate of 5.25% Monday amid early demand for funds from some banks and primary dealers, dealers said. The call money rate is seen in the 4.60-5.35% range.

GOVERNMENT BONDS

Gilt prices may fall at the open Monday, tracking the rise in US Treasury yields after Fed Chair Warsh's surprisingly hawkish comments, dealers said. The market will also track developments in the war in West Asia and movements in Brent crude oil prices.

Traders are likely to refrain from aggressive bets ahead of the release of India's June-quarter GDP data at 1600 IST, which may weigh on volumes, dealers said. The prices of short-term gilts may fall more than those of longer-term bonds, in line with the reaction in US yields, they said. The fall may be limited by the large foreign currency non-resident deposits banks are receiving before the window for mobilisation of the funds, which are likely to be deployed into gilts, closes Monday.

After market hours Friday, the RBI said the government will buy back INR 300 billion worth of four gilts at auction Thursday. The bonds selected for the buyback are the 7.33%, 2026 bond; 5.74%, 2026 bond; 8.15%, 2026 bond; and 8.24%, 2027 bond. The bonds are the same as those selected at previous buyback auctions, which is likely to keep the amount offered at the auction below the notified amount, dealers said.

On a longer-term view, expectations of rate hikes in 2026 are growing after the RBI's rate-setting panel focused on the possibility of such hikes at its meeting earlier in the month. Some traders expect the yield on the 10-year benchmark bond to rise above 7% in the coming months if the RBI raises the repo rate, dealers said. In such a scenario, some traders expect the yield on the 10-year benchmark to halt at 7.20% in the current calendar year.

The supply of government securities in the second half of the current financial year will also play a key role in determining the movement of the yield curve, dealers said. Some traders expect the state government borrowing calendar for the December quarter to be similar in size to that of the year-ago period.

The yield on the 6.94%, 2036 bond is seen moving between 6.85% and 6.93%, dealers said. Any significant movement in the rupee and swap rates will also lend cues, they said. Friday, the bond had ended at INR 100.19, or 6.9108% yield.

OIS RATES

Swap rates may rise Monday tracking US Treasury yields, which rose sharply after Warsh's comments at the Jackson Hole symposium, dealers said. The comments led markets to increase bets on a US rate hike at the September meeting, dealers said. The shift in expectations is also putting pressure on domestic rate-hike expectations, which is likely to be reflected in OIS rates. Developments in the war in West Asia and their impact on crude oil prices may also lend direction to swap rates.

The subscription at the 15-day variable rate reverse repo auction for INR 6.00 trillion may be a key factor to determine the movement in near-term OIS rates. This is the largest notified amount for a tender to drain frictional liquidity since May 2022. This is also the first time since November 2024 that the central bank is conducting a VRRR auction of two weeks or longer.

Traders will also focus on India's June-quarter GDP data, due 1600 IST. Monday, the one-year swap rate is seen in the range of 5.82-6.04% and the five-year rate at 6.30-6.52%. Friday, the one-year OIS rate ended at 5.95% and the five-year rate at 6.44%.

CALL

The one-day call money rate is likely to open near the RBI's repo rate of 5.25% Monday on early demand for funds from some banks and primary dealers. Banks may lend at higher rates as they have the opportunity to park funds near the repo rate at the variable rate reverse repo auction, dealers said. The two-day call rate ended at 4.75% Saturday.

The RBI will conduct a 15-day VRRR auction for INR 6.00 trillion between 0930 IST and 1000 IST Monday. This is the largest such auction since May 2022 and the first time the central bank is conducting a VRRR auction of more than two weeks' maturity since November 2024.

Dealers expect the auction to receive a modest subscription, as the funds will be reversed on Sept. 15, when banks are likely to need liquidity ahead of advance tax outflows. The long tenure and large size of the auction may leave it undersubscribed, they said. After the 15-day tender, traders expect the RBI to also conduct an overnight VRRR, as it has been doing regularly in recent weeks, which may receive a better response from the market.

Dealers expect the call money rate to move in the 4.60–5.35% range. The tri-party repo rate is seen at 4.40–5.25%. The weighted average call money rate is expected to be in the 5.10–5.35% range and that in the tri-party repo market is likely to be at 4.95–5.20%, they said.

RBI AUCTION

--RBI to hold 15-day variable rate reverse repo auction for INR 6.00 trillion 0930-1000 IST Monday

LIQUIDITY

Total net outflows of INR 330.07 billion. The calculation does not take into account redemption of the Standing Deposit Facility and scheduled variable rate repo and variable rate reverse repo operations.

* Inflows

--INR 9.93 billion as coupon on state bonds Sunday

--INR 919.80 billion as reversal of seven-day variable rate reverse repo Monday

--INR 1.53 trillion as reversal of three-day variable rate reverse repo Monday

* Outflows

--INR 340.00 billion payment as payment for gilts Mon

End

US$1 = INR 95.3775

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

Reported by Divya Moolayattil and Aaryan Khanna

Edited by Rajeev Pai

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