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Informist, Saturday, Feb. 1, 2025

MUMBAI – On Monday, government bond prices and overnight indexed swap rates are seen taking cues from Saturday's Union Budget for 2025-26 (Apr-Mar). The government projected a fiscal deficit target of 4.4% of GDP, against traders' expectations of 4.5%, which is seen positive for gilt prices. However, the increase in the borrowing figures may weigh on gilt prices, dealers said.

The government will borrow INR 14.82 trillion through the sale of dated securities on a gross basis in FY26, up from INR 14.01 trillion budgeted in FY25. The figure is up from the INR 14.55 trillion pegged by an Informist poll of 18 analysts. On a net basis, the government will sell bonds worth INR 11.54 trillion, up from the poll estimate of INR 11.20 trillion.

Traders may also place bets on the policy repo rate cut at the upcoming outcome of the Monetary Policy Committee's meeting, scheduled Friday, dealers said. The impact of gilt yields post the Budget may lend direction to swap rates, too, dealers said. Movement of US Treasury yields and crude oil prices may also lend direction to both gilt prices and the swap rates.

On Monday, the one-day call money rate may open above the RBI's repo rate of 6.50% due to demand for funds from banks early in the day to meet their reserve requirements. During the day, the call rate is seen in a range of 6.00-6.90%, dealers said. On Saturday, the two-day call rate ended at 6.00%.

GOVERNMENT BONDS

Gilt prices will take direction from the gross and net market borrowing figures announced for FY26 in the Union Budget on Saturday, dealers said. The prices may open slightly higher after the Union Budget for 2025-26 (Apr-Mar) projected a fiscal deficit target of 4.4% of GDP against traders' expectations of 4.5%, dealers said. Some traders, however, expect the higher-than-view borrowing figures to weigh on prices. Meanwhile, traders may place bets on the policy rate cut at the upcoming outcome of the Monetary Policy Committee meeting, scheduled for Friday.

Bonds may also take cues from changes in US Treasury yields and crude oil prices, as well as the movement of the rupee against the dollar intraday. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.55-6.80% during the day. On Friday, the bond settled at INR 100.62, or 6.70% yield.

OIS RATES

On Monday, swap rates may take cues from the Union Budget and its expected impact on the economy and financial markets. The impact of gilt yields post the Budget may lead traders to change their positioning in the swap market, dealers said.

Swap rates may also take cues from the movement of US yields after the release of US December personal consumption expenditure data, which met estimates of a 2.6% annual rise. The core component, the US Federal Reserve's preferred inflation gauge, rose to 2.8% in December, the same as in November. 

The impact of RBI's liquidity injection measures over the next few days and weeks is also being closely watched. Short-term swap rates may remain near the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – is expected to be set nearer 6.50%, with the banking system liquidity deficit also seen coming down, dealers said. The liquidity measures are seen as a precursor to a rate cut by the MPC next week.

The movement in crude oil prices and any declarations by US President Trump may also be triggers. The swap rate in the one-year segment is seen at 6.23-6.41% and in the five-year segment at 6.00-6.15%. On Friday, the one-year swap rate ended at 6.33% and the five-year swap rate closed at 6.09%.

Call

On Monday, the one-day call money rate may open above the RBI's repo rate of 6.50% due to demand for funds from banks early in the day to meet their reserve requirements. During the day, the call rate is seen in a range of 6.00-6.90%, dealers said. On Saturday, the two-day call rate ended at 6.00%.

RBI AUCTION

--RBI to hold overnight VRR auction for INR 750 bln 1000-1030 IST on Monday

LIQUIDITY

--Total net outflows are INR 135.60 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 36.91 billion as coupon on 8.26%, 2027 gilt on Sunday

--INR 44.89 billion as coupon on 8.32%, 2032 gilt on Sunday

--INR 11.42 billion as coupon on state bonds on Sunday

--INR 30.00 billion as redemption of state bonds on Sunday

--INR 35.49 billion as coupon on 5.77%, 2030 gilt on Monday

--INR 5.69 billion as coupon on state bonds on Monday

* Outflows

--INR 300 billion as payment for gilts on Monday

--INR 1 trillion as reversal of 3-day variable rate repo tender on Monday

End

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

Reported by Vidhushi RajPurohit

Edited by Deepshikha Bhardwaj

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