India Money Market Outlook
Gilts seen higher Wednesday on rate cut hopes
This story was originally published at 22:26 IST on 28 January 2025
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MUMBAI – On Wednesday, government bond prices may open slightly higher on hopes of a repo rate cut in the monetary policy review next week, dealers said. The liquidity infusion measures announced by the Reserve Bank of India on Monday are seen as positive for bond prices. Some caution ahead of Saturday's Budget for 2025-26 (Apr-Mar) may keep prices from rising sharply, dealers said.
Gilts and overnight indexed swap rates may take cues from the movement in crude oil prices and US Treasury yields, dealers said. Traders will also closely watch any policy pronouncements of US President Donald Trump. Traders will also remain watchful ahead of the US Federal Open Market Committee rate decision at 0030 IST Thursday, with the two-day meet starting Tuesday, dealers said. The CME FedWatch tool showed that Fed fund futures have almost fully priced in a status quo in rates at this meeting.
On Wednesday, the one-day call rate may open around the repo rate on demand for funds from banks. During the day, the call rate is seen in a range of 6.00-6.90%, dealers said.
GOVERNMENT BONDS
Bonds may also take cues from the movement of US yields, dealers said. Any geopolitical cues and crude oil prices will also impact gilt prices. Prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar.
Traders may pick up bonds the RBI has offered to buy at its first bond purchase auction since September 2021. At the OMO auction on Thursday, the RBI will buy five bonds, including the 10-year benchmark 6.79%, 2034 bond, erstwhile 10-year gilts the 7.18%, 2033 bond and the 7.10%, 2034 bond, the 7.59%, 2029 bond and the former 14-year benchmark 7.18%, 2037 bond.
The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.62-6.72% during the day. On Tuesday, the bond settled at INR 100.70, or 6.69% yield.
OIS RATES
On Wednesday, swap rates may take cues from the movement in crude oil prices and US yields, dealers said. The FOMC meeting outcome at 0030 IST Thursday may also lend cues.
The impact of RBI's liquidity injection measures over the next few days and weeks will also be closely watched. Short-term swap rates may remain anchored as the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – is expected to be set near 6.50% for the next few days, with the banking system liquidity deficit also seen coming down, dealers said.
The Union Budget on Saturday and the MPC's meeting next week are the next major domestic cues for traders. The swap rate in the one-year segment is seen at 6.28-6.41% and in the five-year segment at 6.00-6.15%. On Tuesday, the one-year swap rate ended at 6.37% and the five-year swap rate closed at 6.11%.
CALL
On Wednesday, the one-day call rate may open around the repo rate on demand for funds from banks. RBI will conduct an overnight variable rate repo auction for INR 1.75 trillion at 1000-1030 IST on Wednesday.
During the day, the call rate is seen in a range of 6.00-6.90%, dealers said. On Tuesday, the one-day call rate ended at 6.55%.
RBI AUCTION
--RBI to auction 91-day T-bills worth INR 120 billion
--RBI to auction 182-day T-bills worth INR 80 billion
--RBI to auction 364-day T-bills worth INR 80 billion
--RBI to conduct an overnight variable rate repo auction for INR 1.75 trillion at 1000-1030 IST.
LIQUIDITY
--Total net outflows are INR 302.33 billion. Calculation of flows does not take into account redemption of the standing deposit facility and scheduled variable rate repo and reverse repo operations.
* Inflows
--INR 12.67 billion as coupon on state bonds
--INR 5.00 billion as redemption of state bonds
* Outflows
--INR 320.00 billion payment on state bonds
--INR 1.39 trillion on redemption of overnight variable rate repo tender
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Reported by Srijita Bose
Edited by Ashish Shirke
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