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Informist, Tuesday, Jul. 22, 2025

MUMBAI – Government bonds and overnight interest rate swaps are likely to take cues from the overnight movement of US Treasury yields on Wednesday, dealers said. Traders expect the US Federal Open Market Committee to hold the Fed funds rate at its meeting on Jul. 29-30.

Gilt traders are also likely to place bets on a rate cut or softer commentary from the Reserve Bank of India at the monetary policy review in early August, dealers said. The 10-year benchmark gilt may underperform ahead of its auction on Friday.

Traders expect India and the US to strike a preliminary trade deal soon. This is likely to help the rupee appreciate and also result in some foreign portfolio investment inflows into both equities and fixed income, dealers said. The rupee ended at a near one-month low of 86.37 a dollar Tuesday.

On Wednesday, the one-day call rate is likely to open above the Reserve Bank of India's repo rate, driven by demand for funds after goods and services tax outflows. During the day, the call rate is seen in a range of 5.00-5.60% and the tri-party repo rate in a range of 4.90-5.50%.

GOVERNMENT BONDS

On Wednesday, gilts may take cues at open from the movement in US Treasury yields overnight. Traders may build up portfolios betting on a rate cut or softer commentary from the RBI in the monetary policy review in early August, dealers said.

Short-term bonds may remain well bid after RBI Governor Malhotra provided clarity on the central bank's liquidity management aims and said he would ideally like call money rates to adhere to the policy repo rate of 5.50%, dealers said. The 6.33%, 2035 gilt may underperform other gilts this week ahead of its auction on Friday, with INR 300 billion of fresh supply of the 10-year benchmark gilt.

Crude oil price movements may also lend cues. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.26-6.34% and that on the most traded 6.79%, 2034 bond is seen at 6.32-6.38%. Tuesday, the 6.33%, 2035 bond ended at INR 100.16, or 6.31% yield, while the 6.79%, 2034 bond ended at INR 102.94, or 6.36%.

OIS RATES

Wednesday, swaps may track the overnight movement of US Treasury yields, dealers said. On the global front, traders await the outcome of the US Federal Open Market Committee's meeting at the end of the month. Traders expect the FOMC to hold rates at this meeting, and some believe the RBI's rate-setting panel will not cut rates further until the FOMC does so, to protect the interest rate differential between the two countries. Traders will closely track any comments from US President Donald Trump on US Federal Reserve Chair Jerome Powell.

On the domestic front, traders will closely monitor overnight borrowing rates and the overnight Mumbai Interbank Outright Rate. Traders do not expect the RBI to announce any further variable rate reverse repo auctions until Friday, due to pressure on systemic liquidity resulting from outflows for goods and services tax. Swaps may track the movement in gilt yields.

Swap traders will also track developments in the India-US trade talks and the negotiations between the US and other trading partners, dealers said. The impact of a trade deal between India and the US, or the lack thereof, will be reflected in the swaps through the movement in the rupee against the dollar, dealers said.

The one-year swap rate is seen in the range of 5.42-5.55% Wednesday. The five-year contract is seen at 5.62-5.78%. On Tuesday, the one-year swap ended at 5.50% and the five-year swap at 5.68%.

CALL

On Wednesday, the one-day call rate is likely to open above the RBI's repo rate due to demand for funds following goods and services tax outflows. During the day, the call rate is seen in a range of 5.00-5.60% and the tri-party repo rate in a range of 4.90-5.50%.On Monday, the one-day call money rate ended at 5.00% while the tri-party repo rate ended at 5.71%.

RBI AUCTION

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

--RBI to auction 182-day T-bills worth INR 60 billion

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

LIQUIDITY

--Total net outflows of INR 87.73 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 19.77 billion as coupon on state bonds

* Outflows

--INR 107.50 billion as payment for state bonds 

End

US$1 = INR 86.37

Reported by Aaryan Khanna

Edited by Saji George Titus

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