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Informist, Thursday, May 8, 2025

MUMBAI - Developments on the India-Pakistan front will give direction to government bonds and overnight indexed swaps on Friday. Any escalation in tension between the two nuclear neighbours could lead to a fall in gilt prices and a rise in swap rates, dealers said.

A day after the air strikes on nine locations in Pakistan and Pakistan-Occupied Jammu & Kashmir, Indian armed forces targeted air defence radars and systems in Pakistan in retaliation for Islamabad's attempt to target military establishments in northern and western India. At a media briefing Thursday evening, Foreign Secretary Vikram Misri said India's response to Islamabad's attempt to target military establishments in India was precise and non-escalatory.

The two markets may also take direction from the overnight movement in US Treasury yields and crude oil prices. For the first half of the day, traders will also focus on the Reserve Bank of India's open market operation auction to purchase gilts and the weekly gilt auction sale, dealers said.

On Friday, the four-day call rate may open below the RBI's repo rate on comfortable liquidity, dealers said. RBI-administered markets are shut on Monday for Buddha Purnima. During the day, the call rate is seen at 5.50-5.95% and the tri-party repo rate at 5.50-5.90%.

GOVERNMENT BONDS

On Friday, government bond prices may closely track any developments on the border, dealers said. Any further escalation in tension between the two countries may lead to a further fall in prices and the 10-year gilt yield may rise to 6.42-6.43%, dealers said. Traders may also look to sell gilts to avoid exposure to geopolitical risks going into the long weekend, they said. 

Prices will also take cues from the Reserve Bank of India's open market operation auction to purchase gilts and the weekly gilt auction sale, dealers said. The RBI has offered to buy the 6.54%, 2032, the 7.57%, 2033, the 6.19%, 2034, the 6.64%, 2035, and the 7.54%, 2036 gilts at the OMO auction.

Traders are expected to tender gilts closer to the market levels as they have already lightened their books significantly over the last few days, they said. Moreover, investors have already sold over INR 4.00 trillion through OMO auctions in 2025, and banks will not be aggressive in seeking to book profits, they said. The INR-320-billion weekly gilt auction at 1030-1130 IST is expected to sail through, albeit a weaker demand for the 6.90%, 2065 bond as the rising border tensions have reduced appetite for long-duration papers.

Gilts may also take cues from the movement in US Treasury yields and crude oil prices overnight. India's GDP growth estimates for Jan-Mar and the annual estimate for 2024-25 (Apr-Mar), due at the end of May, could be the next big trigger for gilts.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.36-6.42% on Friday. On Thursday, the 10-year benchmark gilt ended at INR 102.74 or 6.40% yield.

OIS RATES

On Friday, swap rates will be driven by developments on the India and Pakistan front, dealers said. Traders are on the watch for further escalation in tension.

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 Friday. The five-year contract is also seen in the 5.45-5.70% range. On Thursday, the one-year swap rate ended at 5.67% and the five-year swap rate closed at 5.68%.

CALL

On Friday, the four-day call rate may open below the RBI's repo rate on comfortable liquidity. RBI-administered markets are shut on Monday for Buddha Purnima. 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 Thursday, the one-day call ended at 5.85%.

RBI AUCTION 

--RBI to buy five gilts worth INR 250 billion via OMO auction 0930-1030 IST

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

--Government to sell two gilts worth INR 320 billion 1030-1130 IST

LIQUIDITY

--Total net inflows of INR 67.80 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 25.28 billion as coupon on 5.15%, 2025 bond

--INR 38.43 billion as coupon on 7.61%, 2030 bond

--INR 4.09 billion as coupon on state bonds

* Outflows

--INR 80.74 billion on reversal of overnight variable rate repo tender

End

Reported by Vidhushi RajPurohit

Edited by Saji George Titus

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