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Informist, Thursday, May 22, 2025

NEW DELHI – Government bond prices and overnight indexed swap rates will take cues from the overnight movement in US Treasury yields on Friday. The impact of offshore cues on the gilt market may be limited ahead of significant domestic cues later in the day.

US yields are expected to rise after the US House of Representatives passed a spending bill on Thursday that includes tax cuts and is expected to widen the fiscal deficit. Gilt traders said the focus of the domestic market would be on the bond auction at 1030-1130 IST, with the government offering to sell two bonds worth INR 270 billion.

The Reserve Bank of India is also expected to announce the transfer of surplus to the government for 2024-25 (Apr-Mar) on Friday. Traders estimate the transfer to be INR 2.5 trillion to INR 3.5 trillion.

The 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 during the day.

On Friday, the three-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 Friday, the overnight movement in US Treasury yields may lend cues at the open, though the impact of the offshore cue may be limited amid key domestic triggers later in the day. The government will sell INR 270 billion of two gilts at 1030-1130 IST. 

Demand for the 6.75%, 2029 bond is expected to be firm from state-owned banks and mutual funds, while the 7.09%, 2054 bond may also be well bid after its yield rose Thursday. Traders may avoid aggressive bets at the auction ahead of the announcement on the RBI surplus transfer to the government, which is expected Friday.

The surplus transfer is expected to be INR 2.5 trillion to INR 3.5 trillion and gilt prices may fall if the surplus transfer is at the lower end of the range, dealers said. The surplus transfer will add durable liquidity and shore up the government's fiscal situation. Traders also keenly await any change in the central bank's economic capital framework after the RBI board's review, likely to be announced Friday.

India's GDP growth estimates for Jan-Mar and for FY25, due on May 30, may be the next big trigger for gilts. Traders expect a print of 6.0-6.5%, against some economists' estimates of 6.8%, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond, is seen at 6.20-6.30% on Friday, while the 6.33%, 2035 bond is seen at 6.18-6.28%.

On Thursday, the 6.79%, 2034 gilt ended at INR 103.62, or 6.27% yield. The new 10-year 6.33%, 2035 bond ended at INR 100.70, or 6.23% yield. 

OIS RATES

On Friday, rates are likely to track the movement of US Treasury yields after the release of weekly jobs data and the statement by New York Federal Reserve President John Williams, dealers said. A further rise in US yields could push up the five-year swap rate more than 10 bps, they said. 

Traders will also await the announcement of the RBI's surplus transfer to the central government, likely on Friday. Traders estimate a bumper surplus transfer, which will add durable liquidity to the banking system. If the transfer is in line with or above the median estimate of around INR 3 trillion, it could pull down swap rates, dealers said. The next significant cue on domestic interest rates would be the release of GDP data for Jan-Mar and 2024-25 (Apr-Mar) on May 30, they said.

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% Friday. The five-year contract is seen in the range of 5.50-5.84%. On Thursday, the one-year swap rate ended at 5.58% and the five-year swap rate closed at 5.67%.

CALL

On Friday, the three-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 5.45%.

RBI AUCTION

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

--Government to sell two bonds worth INR 270 billion 1030 IST and 1130 IST 

LIQUIDITY

--Total net outflows of INR 181.95 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 8.74 billion as coupon on state bonds

--INR 58.02 billion as coupon on 7.54%, 2036 gilt

--INR 74.00 billion as redemption of 182-day T-bills

--INR 41.19 billion as redemption of 364-day T-bills

* Outflows

--INR 43.41 billion on reversal of overnight VRR tender

End

Reported by Aaryan Khanna 

Edited by Saji George Titus

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