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Informist, Wednesday, May 7, 2025

NEW DELHI – Developments on the India-Pakistan front will give direction to bonds and swaps on Thursday after India carried out airstrikes in Pakistan territory on Wednesday. Any escalation in tension between the two nuclear neighbours could lead to a fall in gilt prices and a rise in overnight indexed swap rates, dealers said.

The two markets may also take direction from the overnight movement in US Treasury yields and crude oil prices. The movement in the US yields after the Federal Open Market Committee's rate decision at 2330 IST will be closely watched. While the widespread expectation is that the panel will hold rates, traders await US Federal Reserve Chair Jerome Powell's comments on US tariff polices, dealers said.

On Thursday, the one-day call rate may open below the repo rate due to comfortable surplus liquidity, dealers said. During the day, the call rate is seen at 5.50-5.95% and the triparty repo rate at 5.50-5.90%.

GOVERNMENT BONDS

On Thursday, government bond prices may closely track developments in military activity between India and Pakistan after India's airstrikes on Wednesday. Any further escalation in activity between the two countries may lead to a fall in prices, and the 10-year gilt yields may trend towards 6.40% as traders would be caught wrong-footed, after expecting a de-escalation going ahead, dealers said.

Demand for bonds maturing between 2028 and 2039 is seen as robust as banks look to replenish stocks of bonds in similar maturities sold to the RBI at open market operation auctions. These bonds may be in favour during the day, even if tension between the two neighbours remains high.

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 Thursday. On Wednesday, the 10-year benchmark gilt ended at INR 103.17 or 6.34% yield.

OIS RATES

On Thursday, swap rates will be driven by developments on the India and Pakistan front, dealers said. Traders are on the watch for Pakistan's response to the Indian airstrikes. Traders will also take cues from the US Federal Open Market Committee's rate decision at 2330 IST.

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.

The one-year swap rate is seen in a range of 5.45-5.70% on Thursday. The five-year contract is also seen in the 5.45-5.70% range. On Wednesday, the one-year swap rate ended at 5.60% and the five-year swap rate closed at 5.56%.

CALL

On Thursday, 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 5.50-5.95% and the tri-party repo rate at 5.50-5.90%. On Wednesday, the one-day call ended at 5.50%.

RBI AUCTION 

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

LIQUIDITY

--Total net inflows of INR 104.87 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 15.55 billion as coupon on state bonds

--INR 185.00 billion as redemption of 91-day T-bills

--INR 70.00 billion as redemption of 182-day T-bills

--INR 85.28 billion as redemption of 364-day T-bills

* Outflows

--INR 108.00 billion as payment for 91-day T-bills

--INR 60.00 billion as payment for 182-day T-bills

--INR 82.96 billion as payment for 364-day T-bills

--INR 51.92 billion on reversal of overnight VRR tender

End

Reported by Aaryan Khanna

Edited by Saji George Titus

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