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Informist, Wednesday, Sept. 16, 2026

MUMBAI – Government bond prices and overnight indexed swap rates are seen taking direction from the movement in US Treasury yields after the US Federal Open Market Committee's rate decision at 2330 IST Wednesday. 

Bond market participants may see a hike as a sign that the FOMC is getting ahead of inflation and may be able to manage above-target inflation with a lower terminal policy rate, which may pull down US yields, dealers said. Inaction on the policy rate may pull down short-term US yields, while pushing up the widely watched 10-year yield.

Developments in the West Asia war and their impact on crude oil prices will also act as a trigger for gilt prices. High US yields and crude oil prices have pushed India's gilts out of favour with foreign investors and make the case for a domestic repo rate hike as soon as October, dealers said. 

GILTS

On Thursday, gilt prices will take direction from the movement in US Treasury yields after the US Federal Open Market Committee's rate decision at 2330 IST Wednesday, dealers said. The US panel is widely expected to hike its policy rate in order to contain the higher-than-target inflation.

After the initial move, traders will closely track the result of the RBI's first OMO auction to sell bonds in five years. The RBI will sell the 7.59%, 2029 bond, the 6.79%, 2029 bond, the 7.61%, 2030 bond, the 5.77%, 2030 bond, the 6.68%, 2031 bond, and the 8.28%, 2032 bond at the auction at 0930-1030 IST. Traders do not expect the RBI to accept bids worth the entire notified amount at the OMO sale as it would have to set cut-off yields sharply higher than market levels to drain liquidity, dealers said. Although there were some concerns that the RBI could conduct more OMO sale auctions than the three announced, traders expect the central bank to switch to other methods after the Monetary Policy Committee's rate decision on Oct. 7.

Traders are also waiting for the release of the borrowing calendar for state and central government bond issuances for the next quarter and the second half of the current financial year, respectively. The proportion of different bond tenures in the calendar will lend cues to the shape of the gilt yield curve, dealers said. The RBI has held several meetings with market participants this month to discuss the Centre's borrowing calendar, they said. 

Any significant movement in the rupee and swap rates will also lend cues, they said. The yield on the 10-year benchmark 6.94%, 2036 bond is seen moving between 6.95% and 7.14%, dealers said.

On Wednesday, the 10-year benchmark 6.94%, 2036 gilt ended at INR 99.21, against INR 99.07 Tuesday. The bond's yield fell to 7.0524% from 7.0727% at the end of the previous session.

OIS

On Thursday, swap rates are expected to track the movement in US yields after the FOMC's decision on policy rates, dealers said. Traders will also track movement in oil prices. Dealers expect that if the Fed opts for a rate hike, the RBI's rate-setting panel will follow suit in October.

Alongside liquidity-draining measures by the RBI, such as OMO sales and variable rate reverse repo operations, traders also expect the RBI to conduct dollar-rupee sell-buy swaps in both the primary and secondary markets. 

As received bets linked to banks' inflows from foreign currency non-resident (banks) deposits stopped nearing the end of the deadline Friday to swap dollars under this scheme, swap rates may no longer be capped, dealers said. After the OMO sales announcement, bets that the swap rate curve would flatten and take time to play out have been wiped out as the RBI begins draining liquidity. The one-year swap rate is seen in the range of 5.95-6.15% and the five-year at 6.40-6.70%.

CALL

The one-day call money rate is seen opening above the RBI's Standing Deposit Facility rate of 5.00%, at 5.05-5.10%, on Thursday ahead of the RBI's INR-500-billion open market operations auction to sell gilts, dealers said. The RBI will be selling gilts worth INR 1 trillion through open market operations in September to drain excess liquidity surplus from the banking system. The tri-party repo rate is likely to open in the range of 4.80-4.85%, dealers said. Dealers expect the one-day call rate to be at 4.50–5.15% Thursday.

As advance tax outflows of around INR 1.70 trillion for the September quarter are completed, market participants expect the RBI to continue with the overnight VRRR auctions of the size of around INR 3 trillion. After outflows of goods and services tax payments, the RBI is likely to reduce the size of the VRRR auctions further. The central bank will conduct an overnight INR-3.00-trillion auction to drain liquidity at 0930-1000 IST Thursday. 

Market participants will take cues from the RBI's INR-500-billion open market operations auction Thursday to sell gilts, dealers said. Some market participants expect the RBI to conduct more open market operations auctions to sell gilts after the sale of INR 1 trillion worth of gilts in September. "CRR (Cash reserve ratio) hike is counterintuitive, so RBI may come up with more OMO sales," a dealer at a private sector bank said. On Wednesday, the one-day call rate ended at 5.10%.

RBI AUCTION

--RBI to sell INR 500 bln of gilts via OMO auction Thu 

LIQUIDITY

Total net inflows of INR 295.73 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 154.00 billion as coupon on 91-day T-bills 

--INR 68.11 billion as coupon on 364-days T-bills

--INR 14.84 billion as coupon on state bonds

--INR 39.65 billion as coupon on 6.68%, 2031 gilts

--INR 2.50 trillion as reversal of overnight variable rate reverse repo tender

--INR 403.02 billion as reversal of overnight variable rate reverse repo tender

* Outflows

--INR 236.39 billion as payments for for 91-day T-bills

--INR 80.00 billion as payment for 182-day T-bills

--INR 70.00 billion as payment for 364-day T-bills

End

US$1 = INR 95.96

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

Reported by Meera Nair

Edited by Avishek Dutta

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