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Informist, Wednesday, May 21, 2025

MUMBAI – On Thursday, government bonds and overnight indexed swaps may take cues from the outcome of the Reserve Bank of India's meeting with bank executives held Wednesday to discuss changes in the existing liquidity management framework. Bank officials recommended that the central bank return to its overnight liquidity management operations, and to re-introduce fixed-rate repos and variable rate reverse repo auctions, attendees of the meeting told Informist. Bank officials also asked the central bank to reduce the daily maintenance level of the cash reserve ratio, they said.

Gilts and swaps may also take cues from the overnight movement in US Treasury yields after comments from US Federal Reserve officials, dealers said. India's GDP growth estimates for Jan-Mar and for the financial year 2024-25 (Apr-Mar), due May 30, are likely to be the next big trigger for gilts and swaps. Traders expect a print of 6.00-6.50%, lower than some economists' estimates of 6.80%, dealers said.

Traders are also waiting for the RBI to declare how much of its surplus it will transfer to the central government. The announcement is expected to be made after a meeting of the central bank's board, likely Friday. Traders estimate that the RBI will transfer a surplus of around INR 3 trillion to the government. This will add durable liquidity to the banking system. If the transfer is in line with or above this estimate, it could pull swap rates and gilt yields down, dealers said.

Overnight movement in crude oil prices may also lend direction to both markets, dealers said. Any sharp movement in the Indian rupee against the dollar will provide some cues to traders through the day.

On Thursday, the one-day call money rate may open below the RBI's repo rate of 6.00% on ample liquidity. During the day, call rate is seen in a range of 5.60-6.00%, dealers said.

GOVERNMENT BONDS

On Thursday, traders may take cues from the outcome of the RBI's meeting with bank officials Wednesday. Gilt prices may also take cues from the movement in US Treasury yields after comments from US Federal Reserve officials, dealers said. 

In the secondary market, demand for gilts maturing in up to five years is likely to continue as traders prefer the shorter end of the yield curve on the expectation of further rate cuts, along with demand to replenish banks' 'held-to-maturity' books. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.20-6.25% on Thursday. On Wednesday, the 10-year benchmark gilt ended at INR 103.82, or 6.24% yield.

OIS RATES

On Thursday, rates are likely to track the movement of US Treasury yields after comments from US Fed officials, dealers said. Traders may also take cues from the outcome of the RBI's meeting with bank officials Wednesday.

Traders will also track the movement of the overnight Mumbai Interbank Offered Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.50-5.75% Thursday. The five-year contract is also seen in the 5.50-5.84% range. On Wednesday, the one-year swap rate ended at 5.56% and the five-year swap rate closed at 5.63%.

CALL

On Thursday, the one-day call money rate may open below the RBI's repo rate of 6.00% on ample liquidity. During the day, call rate is seen in a range of 5.60-6.00%, dealers said. On Wednesday, the one-day call ended at 5.40%.

RBI AUCTION

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

LIQUIDITY

--Total net outflows of INR 225.87 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 23.00 billion as coupon on state bonds

* Outflows

--INR 123.00 billion as payment for 91-day T-bills

--INR 75.00 billion as payment for 182-day T-bills

--INR 50.88 billion as payment for 364-day T-bills

--INR 43.48 billion on reversal of overnight VRR tender

End

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

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