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Informist, Tuesday, Oct. 6, 2026

 

MUMBAI – Government bond prices and swap rates are likely to open steady Wednesday due to caution before the key policy rate announcement at 1000 IST. While most traders expect a 25-bps rate hike at the October meeting, the market remains divided on the change in stance. A rate hike, if announced, may not lead to a sharp reaction. RBI Governor Sanjay Malhotra's comments on inflation, GDP growth, and measures to drain liquidity will be closely watched, dealers said. 

 

Traders expect the central bank to introduce more measures to drain systemic liquidity beyond the government bond sales it conducted this month and variable rate reverse repo operations, dealers said. Some expect more open market sales of gilts of up to INR 1 trillion in October, while others expect a hike in banks' cash reserve ratio. 

 

Wednesday, the one-day call money rate is expected to hover near the RBI's repo rate of 5.25%. Dealers said rates might rise slightly due to outflows of INR 500 billion for excise duty payments and tax deducted at source. They expect the tri-party repo rate to open around 5.10%, similar to that on Tuesday. 

 

GILTS

Gilts are pricing in a repo rate increase of around 100 bps from current levels and a convincing argument from central bank officials on a shallower rate hike cycle despite high crude oil prices and US yields may lead to a sharp increase in bond prices, dealers said. Most traders expect a maximum rate hike cycle of only 50-75 bps by February, while others see higher inflation leading to four repo rate increases.

 

Bond prices will also track developments in the war in West Asia and its impact on crude oil prices. Significant overnight movement in US Treasury yields may also lend direction to gilt prices Wednesday, dealers said. 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 98.26, or 7.1928% yield on Tuesday, compared to INR 98.14, or 7.2108% Monday. The bond moved between 7.19% and 7.23% yield Tuesday.

 

OIS

Wednesday, swap rates are likely to open steady before RBI Governor Malhotra's statement at 1000 IST detailing the decision of the MPC, with a 25-bps rate hike factored into OIS rates, dealers said. The comments on growth, inflation, and liquidity will be used to assess the trajectory of domestic interest rates, they said. 

 

As the US Federal Reserve hiked interest rates in September, the RBI's rate-setting panel is seen following suit with a 25 bps repo rate hike, dealers said. Inflation readings are rising, while growth indicators show resilience, strengthening the case for repo rate increases. Lack of further policy tightening will lead to a fall in swap rates, dealers said.

 

Later in the day, swap rates may take cues from movements in crude oil prices and US Treasury yields and developments in the war in West Asia, dealers said. The one-year swap rate is seen in the range of 5.95–6.35% and the five-year at 6.55–6.90%.

 

The one-year swap rate ended at 6.24% Tuesday, against 6.26% Monday, with the five-year swap rate also falling by 2 basis points to 6.67%. Total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 598.25 billion Tuesday, sharply higher than INR 386.90 billion Monday.

 

CALL

On Wednesday, the reversal of two long-term VRRR auctions conducted in September and the overnight auction conducted earlier Tuesday are due. A total of INR 3.35 trillion will be reversed Wednesday to the banking system, which was parked with the RBI at these auctions. Some banks opted for the premature reversal option. At the 30-day, INR 7.00-trillion VRRR auction conducted on Sept. 7, banks parked INR 2.59 trillion, but after some banks chose a premature reversal, only INR 1.06 trillion of the total was still parked with the RBI as of Monday. Similarly, funds lent by banks to the RBI at the 26-day VRRR auction for INR 5.00 trillion on Sept. 11 were INR 604.49 billion, which fell to INR 369.49 billion as of Monday. 

 

Market participants remain cautious ahead of the RBI's Monetary Policy Committee's decision, due Wednesday. Most market participants expect the RBI to hike key interest rates by 25 bps Wednesday. Some market participants even expect a 50-bps rate hike, while a few do not expect the central bank to increase key interest rates. Dealers expect the one-day call rate to be at 5.10-5.50% on Wednesday, while the tri-party repo rate for one-day loans is seen at 5.05-5.50% on expectations of a 25-bps rate hike.

 

Dealers expect the RBI to conduct an overnight VRRR auction after the policy announcement on Wednesday. They also expect the central bank to announce measures to drain excess liquidity in the banking system. They expect durable liquidity draining measures such as open market operations sales auctions and temporary draining measures such as long-term VRRR auctions. 

 

The one-day call rate ended at 5.20%, up from 4.80% Monday. 

 

RBI AUCTION

--RBI to hold overnight VRRR auction for INR 3 trillion 1200-1230 IST

--RBI to auction INR 70 bln of 364-day T-bills

--RBI to auction INR 80 bln of 182-day T-bills 

--RBI to auction INR 80 bln of 91-day T-bills

 

LIQUIDITY

Total net outflows of INR 129.63 billion. The calculation does not account for redemptions of the Standing Deposit Facility and scheduled variable rate repo and variable rate reverse repo operations.

 

* Inflows

--INR 6.86 billion as coupon on state bond 

--INR 37.04 billion as coupon on 6.45%, 2029 bond

--INR 62.47 billion as coupon on 6.79%, 2034 bond

--INR 1.92 trillion on reversal of 1-day VRRR

--INR 369.49 billion on reversal of 26-day VRRR

--INR 1.06 trillion on reversal of 30-day VRRR

 

* Outflows

--INR 236.00 billion as payment for state bonds

 

End

 

US$1 = INR 96.42

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

 

Reported by Kabir Sharma

Edited by Avishek Dutta

 

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