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Informist, Monday, Aug. 31, 2026

 

NEW DELHI – Government bond prices and overnight indexed swap rates are likely to track developments in the war in West Asia and Brent crude prices at the open, dealers said. They will also track movements in US Treasury yields, which are pricing in heavy supply and inflation concerns, dealers said. Later in the day, gilt traders will also track the result of the state bond auction worth INR 270 billion. The supply is higher than the INR 242.16 billion indicated in the calendar for the week.

 

From a longer-term perspective, expectations of rate hikes in 2026 have increased after the RBI's rate-setting panel discussed the possibility of such hikes at its meeting earlier this month. Some traders expect the yield on the 10-year benchmark bond to rise above 7% in the next few months if the RBI raises the repo rate, dealers said. In such a scenario, some traders expect the 10-year benchmark yield to peak at 7.20% in the current calendar year. The yield on the 10-year benchmark 6.94%, 2036 bond is seen moving between 6.85% and 6.98%, dealers said.

 

Overnight indexed swap rates Tuesday are likely to track crude oil prices and US Treasury yields, along with fresh developments in the US-Iran war, dealers said. On the domestic front, the focus will be on the Reserve Bank of India's management of surplus liquidity in the banking system, with liquidity hitting its highest since April at about INR 5 trillion over the weekend, due to the Centre's month-end spending and hefty inflows through foreign currency non-resident (banks) deposits, dealers said. The one-year swap rate is seen in the range of 5.85-6.10% and the five-year at 6.30-6.56%.

 

The one-day call rate is expected to open near the RBI's repo rate of 5.25% due to early demand for funds from primary dealers, with banks having the option to deploy cash at the variable rate reverse repo auction, dealers said. FCNR(B) inflows and government spending are likely to have further boosted systemic liquidity, they said. The weighted average rate in the call market is seen in the 4.90-5.20?nd.

 

GOVERNMENT BONDS

Tuesday, gilt prices are likely to track developments in the war in West Asia and Brent crude oil prices at the open, dealers said. They will also track movements in US Treasury yields, which are pricing in heavy supply and inflation fears, dealers said. Later in the day, traders will track the result of the state bond auction worth INR 270 billion. The supply is higher than the INR 242.16 billion indicated in the calendar for the week.

 

On a longer-term view, expectations of rate hikes in 2026 are seen increasing after the RBI's rate-setting panel focused on the possibility of such hikes at its meeting earlier this month. Some traders expect the yield on the 10-year benchmark bond to rise above 7% in the next few months if the RBI raises repo rates, 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.

 

Given the expectation of a rate hike, some traders expect the central bank to announce measures to absorb excess liquidity from the banking system to set the stage for a smooth transmission of rate hikes, dealers said. Traders have pared bets on a steepening of the yield curve after the RBI advanced the closure of FCNR(B) deposits. Traders now expect the curve to flatten. The supply of government securities for the second half of the current financial year will also play a key role in 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 the same period last year. 

 

The yield on the 10-year benchmark 6.94%, 2036 bond is seen moving between 6.85% and 6.98%, dealers said. Any significant movement in the rupee and swap rates will also lend cues, they said.

 

OIS RATES

Tuesday, swap rates will track crude oil prices and US Treasury yields as well as developments in the US-Iran war, dealers said. On the domestic front, traders will closely watch the Reserve Bank of India's management of surplus liquidity in the banking system, with liquidity hitting its highest since April, at about INR 5 trillion, over the weekend, due to the Centre's month-end expenditure and hefty inflows through FCNR(B) deposits, they said.

 

Liquidity is expected to rise this week as banks swap the remaining FCNR(B) inflows under the special facility, while expectations that the RBI will introduce measures to drain durable liquidity, including incremental hikes in the cash reserve ratio, are gaining traction, dealers said. Such a hike in the CRR would set the stage for a repo rate hike at the next policy meeting, dealers said. The one-year swap rate continues to reflect around 100 basis points of repo rate hikes over the next 12 months, dealers said. Tuesday, the one-year swap rate is seen in the range of 5.85-6.10% and the five-year at 6.30-6.56%.

 

CALL

Tuesday, the one-day call rate is expected to open near the RBI's repo rate of 5.25% due to early demand for funds from primary dealers, with banks having the option to deploy the cash at the VRRR auction, dealers said. FCNR(B) inflows and government spending are likely to have further increased systemic liquidity, they said. 

 

The RBI will conduct a seven-day VRRR auction for INR 6.00 trillion at 0930-1000 IST Tuesday. This matches the huge 15-day VRRR tender the central bank conducted Monday, the largest since 2022. With no significant outflows lined up in the week and liquidity surplus rising, the auction may see around INR 2.5 trillion of subscription, dealers said.

 

Dealers expect the one-day call rate at 4.60–5.25% Monday. The tri-party repo rate is expected to be in the 4.50–5.20?nd. The weighted average rate in the call market is seen in the 4.90–5.20?nd, and the tri-party repo rate is likely to be 4.75-5.10%, dealers said.

 

RBI AUCTION

--15 states to raise INR 270 billion via bond sale

--RBI to hold 7-day VRRR auction for INR 6.00 tln 0930-1000 IST 

 

LIQUIDITY

Total net inflows of INR 47.50 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 27.50 billion as coupon on state bonds Tuesday

--INR 20.00 billion as redemption of state bonds Tuesday

--INR 919.80 billion as reversal of one-day variable rate reverse repo Tuesday

 

* Outflows

--Nil

 

End

 

US$1 = INR 95.1625

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

 

Reported by Vaishali Tyagi

Edited by Rajeev Pai

 

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