India Money Market Outlook
Gilts seen down Wed as US slaps tariffs on India
This story was originally published at 21:25 IST on 30 July 2025
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MUMBAI – Government bond prices are likely to fall after US President Donald Trump announced a 25% tariff on Indian exports to the US, plus a penalty for its trade with Russia, dealers said. Gilts and overnight indexed swaps may also take cues from the movement in US Treasury yields after the decision of the Federal Open Market Committee late Wednesday.
The lack of an India-US trade deal before the Aug. 1 deadline is likely to lead to a sharp fall in the rupee against the dollar for the second straight day Thursday. The rupee logged its biggest single-day fall since May 8 and settled at a 5-month low of 87.4200 a dollar Wednesday.
On the liquidity front, traders have priced in overnight borrowing rates close to the repo, not below or above, and await the central bank's draft guidelines on the liquidity management framework. On Thursday, the one-day call rate is likely to open above the RBI's repo rate on the overnight variable rate reverse repo auction notice.
GOVERNMENT BONDS
On Thursday, bond prices are likely to fall after Trump announced a 25% tariff on Indian exports to the US, plus a penalty for its trade with Russia, dealers said. The movement in US Treasury yields after the US FOMC outcome at 2330 IST may also lend cues, though the panel is expected to stand pat on rates.
The lack of an India-US trade deal before the Aug. 1 deadline is likely to lead to foreign banks and portfolio investors shedding gilts on Wednesday.
Long-term gilts may remain under pressure ahead of the INR-320-billion auction Friday, with supply split between the 15- and 40-year benchmark bonds. Post-market hours on Wednesday, the RBI said it will hold an overnight INR 500-billion variable rate reverse repo auction at 0930-1000 IST Thursday. Traders will also look out for any announcement on a new liquidity framework by the RBI for cues to trade gilts maturing up to seven years.
The announcement of an overnight INR 500-billion variable rate reverse repo auction on Thursday may have an impact on short-term bonds. Traders will also look out for any announcement on a new liquidity framework by the RBI for cues to trade gilts maturing up to seven years. RBI Governor Sanjay Malhotra had said he would like the call money rates to adhere to the policy repo rate of 5.50%.
Gilt prices may also take cues from the result of the buyback auction 1030-1130 IST Thursday, dealers said. The government said it would buy back three bonds maturing in 2026-27 (Apr-Mar) worth INR 300 billion.
Movements in crude oil prices may also lend cues. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.35-6.41% and that on the 6.79%, 2034 bond is seen at 6.38-6.47%. On Wednesday, the 2035 bond ended at INR 99.70 or 6.37%, and the 2034 bond ended at INR 102.57 or 6.41%.
OIS RATES
On Thursday, overnight indexed swap rates may track the movement of US Treasury yields after the outcome of the US FOMC meeting. Swaps may also track the movement of crude oil prices and gilt yields. Traders will closely track the comments of US Federal Reserve Chair Jerome Powell on further scope for rate cuts, especially since trade deals between the US and its trade partners have cleared some of the uncertainty for US monetary policy, dealers said.
Swaps may also take cues from the movement of the rupee against the dollar after US President Donald Trump said Washington will impose a 25% tariff on Indian goods, along with an additional penalty, from Friday.
On the liquidity front, traders await the central bank's draft guidelines on the liquidity management framework. Near-term swap rates will track the movement of the overnight MIBOR.
The one-year swap rate is seen in the range of 5.42-5.58% Thursday. The five-year contract is seen at 5.62-5.78%. On Wednesday, the one-year swap rate ended at 5.51% and the five-year swap rate ended at 5.73%.
CALL
On Thursday, the one-day call rate is likely to open above the RBI's repo rate on the overnight variable rate reverse repo auction notice. During the day, the call rate is seen in a range of 4.80-5.60% and the triparty repo rate is seen in a range of 4.70-5.55%. On Wednesday, the one-day call rate ended at 5.36%.
RBI AUCTION
--RBI to hold overnight INR 500-billion variable rate reverse repo auction at 0930-1000 IST
--Govt to buy back INR 300 billion worth of three gilts at 1000-1030 IST
LIQUIDITY
--Total net outflows of INR 230.58 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 90.00 billion on redemption of 182-day Treasury bills
--INR 63.45 billion on redemption of 364-day T-bills
* Outflows
--INR 262.50 billion on payment for 91-day T-bills
--INR 70.00 billion on payment for 182-day T-bills
--INR 51.53 billion on payment for 364-day T-bills
End
US$1 = INR 87.42
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Reported by Srijita Bose
Edited by Saji George Titus
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