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Informist, Tuesday, Aug. 5, 2025

 

MUMBAI – Government bond prices and overnight indexed swap rates are likely to track RBI Governor Sanjay Malhotra's address at 1000 IST Wednesday, along with the post-policy press conference for cues, 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. Traders expect heightened volatility in the gilts and swaps markets during the day owing to a lack of consensus in views and several factors which will affect positioning.

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 CPI inflation forecast for FY26 by 10-30 bps.

Bonds and swaps may also track the movement of the rupee against the dollar. Trump, after Indian market hours, said in an interview with news channel CNBC that the US may "substantially" raise tariffs on India in the next 24 hours. Most traders expect the current 25% tariff imposed by the US on India to result in a slowdown in domestic growth, which could prompt the RBI to cut rates later in the year, dealers said. Any movement in crude oil prices may also lend cues.

 

Traders will also track any announcement on liquidity management, including the new draft liquidity management framework. Details on the Secured Overnight Rupee Rate benchmark, the definition of optimum liquidity in the system, and the central bank's ideal overnight borrowing rate are awaited. Traders speculate that the RBI could opt for daily variable rate repo and variable rate reverse repo auctions or a fixed-rate repo/reverse repo window. Some also speculated that the Liquidity Adjustment Facility corridor could be expanded.

 

Wednesday, the one-day call money rate may open lower than the RBI's repo rate of 5.50% on low demand for funds from banks and speculation of a possible rate cut of 25 bps. If the MPC does not cut rates, traders expect a variable rate reverse repo auction of INR 500 billion to INR 1.00 trillion Wednesday if borrowing rates fall below the current standing deposit facility rate of 5.25%. During the day, the call rate is seen in a range of 4.70-5.50%, dealers said.

 

GOVERNMENT BONDS

Wednesday, bond prices are likely to open steady on caution ahead of RBI Governor Sanjay Malhotra's address at 1000 IST. Some dealers said the 10-year benchmark 6.33%, 2035 gilt yield could rise to 6.37-6.38% if the rate-setting panel leaves the policy rate unchanged Wednesday. 

 

If the panel does cut the repo rate, the 10-year benchmark gilt yield could fall to 6.15-6.18% and stabilise at 6.20%. If the panel does not cut the rate but opens up space for further easing and the central bank lowers both its GDP and CPI forecasts, dealers expect the 10-year yield to fall to 6.25-6.27%, while the five-year benchmark 6.01%, 2030 bond yield could fall to 5.80-5.82%. Dealers said gains may be limited at these levels as traders would not want to purchase gilts aggressively at expensive prices if there were no cues on further rate cuts.  

 

The result of the INR-210.00-billion Treasury bill auction will depend upon the governor's address and the post-policy press conference. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.15-6.40% and that on the 6.79%, 2034 bond is seen at 6.30-6.45%. On Tuesday, the 2035 gilt ended at INR 99.97 or 6.3321% yield, and the 2034 bond ended at INR 102.71, or 6.3935% yield. 

 

OIS RATES

On Wednesday, OIS rates may open steady ahead of RBI Governor Malhotra's statement at 1000 IST, dealers said. The impact of the movement in US Treasury yields may be muted ahead of the domestic rate decision.

 

If the MPC cuts rates by 25 bps, the one-year swap rate may fall sharply to as low as 5.30% and shorter-term swap rates may tumble, dealers said. With a fall in the repo rate, the overnight Mumbai Interbank Outright Rate fixing may fall to around 5.15%, they said. However, if the MPC holds the repo rate at 5.50%, Malhotra's commentary on growth and inflation and the likelihood of further rate cuts in Oct-Dec will determine where swap rates settle. Near-term swap rates will track the movement of the overnight MIBOR, which has been set above 5.40% since Jul. 18.

 

The one-year swap rate is seen in the range of 5.30-5.60% Wednesday. The five-year contract is seen at 5.45-5.75%. On Tuesday, the one-year swap rate ended at 5.44% and the five-year swap rate ended at 5.64%. 

 

CALL

Wednesday, the one-day call money rate may open lower than the RBI's repo rate of 5.50% on low demand for funds from banks and speculation of a possible rate cut of 25 bps. If the MPC does not cut rates, traders expect a variable rate reverse repo auction of INR 500 billion to INR 1.00 trillion Wednesday if borrowing rates fall below the current Standing Deposit Facility rate of 5.25%. During the day, the call rate is seen in a range of 4.70-5.50%, dealers said. On Tuesday, the one-day call rate ended at 4.90%. 

 

RBI AUCTION

--RBI to auction 91-day T-bills worth INR 100 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 186.44 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 26.61 billion as coupon on state bonds

--INR 54.45 billion as coupon on 7.26%, 2033 gilt

 

* Outflows

--INR 267.50 billion as payment for state bonds  

 

End

 

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

 

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