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Informist, Tuesday, May 6, 2025

NEW DELHI – Government bonds and overnight indexed swap rates may take cues from further developments between India and Pakistan's relations following the Pahalgam terrorist attack in April. Traders will also keep an eye on the progress of nation-wide mock drills for civil defence, scheduled for Wednesday, dealers said. The drills may disrupt trading in the two markets, they said.

A rise in tensions between the neighbours led to a sharp fall in gilt prices. Traders will also unwind their received fixed-rate bets if ongoing border skirmishes between the two countries escalate. Foreign banks and portfolio investors would be the first to rush out of domestic assets, dealers said. 

Gilts and swaps could also take cues from US Treasury yields if they move sharply ahead of the US Federal Open Market Committee outcome at 2330 IST Wednesday. The US rate-setting panel is widely expected to keep policy rates unchanged, though traders are looking forward to Fed Chair Jerome Powell's comments on US President Donald Trump's tariff policies. The overnight movement in crude prices may also lend direction.

On Wednesday, the one-day call rate may open below the repo rate due to comfortable surplus liquidity and lack of significant outflows, dealers said. During the day, the call rate is seen at 5.60-6.00% and the triparty repo rate at 5.50-6.00%.

GOVERNMENT BONDS

On Wednesday, government bond prices may closely track any developments in India-Pakistan relations. A rise in tensions between the two countries may lead to a fall in prices and the 10-year gilt yields may trend towards 6.40%, dealers said.

Demand for bonds maturing between 2028 and 2039 is seen robust as banks look to replenish stocks of bonds in similar maturities sold to the RBI at OMO auctions. These bonds may be in favour during the day. Some traders also preferred long-term bonds due to continued investment demand from life insurers, with limited impact of the ongoing border tensions unless there is an escalation, dealers said. Others were looking to trim their duration risk.

India's provisional GDP growth estimates for Jan-Mar and 2024-25 (Apr-Mar), due at the end of May, could be the next big trigger for gilts. Despite geopolitical uncertainty, gilt yields are expected to remain below 6.40% as investors will look to buy gilts on the hope of further rate cuts by the Reserve Bank of India's Monetary Policy Committee.

The yield on the 6.79%, 2034 bond is seen at 6.31-6.40% on Wednesday. On Tuesday, the 10-year benchmark gilt ended at INR 103.07 or 6.35% yield.

OIS RATES

On Wednesday, swap rates may take cues from geopolitical developments between India and Pakistan, dealers said. Traders are on the watch for the nation-wide civil defence mock drill the Indian home ministry has asked to carry out Wednesday. Traders will unwind their received fixed-rate bets if there is a major military conflict between the two countries, dealers said. Caution because of border tensions may deter domestic traders from actively trading in swaps, but activity by offshore participants could spur a movement in rates, dealers said.

Traders will track the movement of the overnight Mumbai Interbank Offer Rate for direction on short-term swap rates. Traders will also take cues from the US Federal Open Market Committee's rate decision at 2330 IST Wednesday.

While a rate cut is not expected at this meeting, traders will see what is US Federal Reserve Chair Jerome Powell's reaction to the changes in US tariffs and polices since the last meeting of the FOMC, a dealer at another private sector bank said. As of 1700 IST, Fed fund futures priced in 97% chance of status quo in the federal funds rate, according to the CME FedWatch tool.

The one-year swap rate is seen in a range of 5.55-5.75% on Wednesday. The five-year contract is also seen at 5.55-5.75% range. On Monday, the one-year and five-year swaps both closed at 5.63%.

CALL

On Wednesday, the one-day call rate may open below the RBI's repo rate on comfortable liquidity. During the day, the call rate is seen at 5.50-6.00% and the tri-party repo rate at 5.50-6.10%. On Monday, one-day call ended at 5.85%.

RBI AUCTION 

--RBI to auction 91-day T-bills worth INR 90 billion

--RBI to auction 182-day T-bills worth INR 50 billion 

--RBI to auction 364-day T-bills worth INR 50 billion

--RBI to hold overnight variable rate repo auction for INR 250 billion 1000-1030 IST

LIQUIDITY

--Total net inflows of INR 57.25 billion. The 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 21.24 billion as coupon on state bonds

* Outflows

--INR 227.22 billion as payment for state bonds

--INR 64.28 billion on reversal of overnight VRR tender

End

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

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