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Informist, Monday, Aug. 4, 2025

 

MUMBAI – Government bond prices and overnight indexed swap rates are likely to take cues from the movement in US Treasury yields on Tuesday, especially after chances of the US Federal Open Market Committee cutting rates in September increased post weak US jobs data, dealers said.

 

Due to the chances of another rate cut in the US, traders expect a third rate cut by the Reserve Bank of India's Monetary Policy Committee in 2025-26 (Apr-Mar). Most expect the cut in Oct-Dec, but some also expect it Wednesday. Dealers expect bond prices to rise, and swap rates to fall further nearing the MPC outcome Wednesday with expectations of softer policy decision, dealers said.

 

Traders expect the central bank to lower its GDP growth forecast of 6.5% for 2025-26 (Apr-Mar) by 15-20 basis points at the MPC outcome, as well as lower its inflation forecast for FY26 by 10-20 bps. The yield on the 10-year benchmark 6.33%, 2035 gilt could fall to 6.30?fore Wednesday, dealers said. If the MPC cuts the repo rate by 25 bps Wednesday, the gilt yield could fall to 6.20-6.25%, but traders do not see the yield falling below that.  

 

Traders will also look out for any further announcements on US tariffs on India. Most traders expect the current 25% tariff imposed by the US on India to lead to a slowdown in domestic growth, which could prompt the RBI to cut rates later in the year, dealers said. 

 

Traders will also look out for any announcement on liquidity management, including the new draft liquidity management framework. A few traders said that if the RBI does not announce a variable rate reverse repo auction for Tuesday, bond prices could rise by 10-15 paise and swap rates could inch lower since traders may interpret it as the central bank paving the way for a softer monetary policy. However, other traders said that VRRR auctions were priced in and that the central bank would keep the effective liquidity surplus at around INR 2.3 trillion to INR 2.5 trillion. Any movement in the rupee against the dollar and crude oil prices may also lend cues. 

 

Tuesday, the one-day call money rate may open near the RBI's repo rate of 5.50% on demand for funds from banks. However, the announcement, or lack of, a variable rate reverse repo auction for Tuesday may lend cues to borrowing rates. Traders will also track the outcome of the Reserve Bank of India's Monetary Policy Committee meeting Wednesday. During the day, the call rate is seen in a range of 4.70-5.50%, dealers said.

 

GOVERNMENT BONDS

On Tuesday, bond prices are likely to take cues from the overnight movement in US yields, dealers said. Traders may also track the result of the INR-271-billion state bond auction Tuesday. Gains in gilts maturing in above 10 years were limited Monday compared to other tenures due to the heavier-than-indicated supply of state bonds Tuesday. The indicative calendar for state borrowing for Jul-Sept showed 17 states would borrow INR 267.17 billion on Tuesday.

 

The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.28-6.35% and that on the 6.79%, 2034 bond is seen at 6.35-6.39%. On Monday, the 2035 gilt ended at INR 100.08 or 6.3179% yield, and the 2034 bond ended at INR 102.82, or 6.3774% yield. 

 

OIS RATES

On Tuesday, overnight indexed swap rates may track the movement of US Treasury yields at the open. The impact of the overseas cue may be limited ahead of the outcome of the MPC's three-day meet Wednesday, as further rate cuts have now been priced into swaps, dealers said. Near-term swap rates will track the movement of the overnight Mumbai Interbank Offer Rate.

 

The one-year swap rate is seen in the range of 5.42-5.58% Tuesday. The five-year contract is seen at 5.62-5.78%.

 

CALL

Tuesday, the one-day call money rate may open near the RBI's repo rate of 5.50% on demand for funds from banks. However, the announcement, or lack of, a variable rate reverse repo auction for Tuesday may lend cues to borrowing rates. Traders will also track the outcome of the Reserve Bank of India's Monetary Policy Committee meeting Wednesday. During the day, the call rate is seen in a range of 4.70-5.50%, dealers said. On Monday, the one-day call rate ended at 4.95%. 

 

RBI AUCTION

--Twelve states to raise INR 271 billion via bond sale

 

LIQUIDITY

--Total net inflows of INR 18.10 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 12.51 billion as coupon on state bonds

--INR 5.00 billion on redemption of state bonds

--INR 585.60 million as coupon on 6.90%, 2034 green bond

 

* Outflows

--Nil

End

 

Reported by Cassandra Carvalho

Edited by Avishek Dutta

 

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