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Informist, Saturday, Aug. 16, 2025

 

MUMBAI – Government bonds and overnight indexed swaps will Monday take cues from the movement of US Treasury yields. Mixed US economic data led to a rise in US yields Friday.

 

Data released Thursday showed an unexpected rise of 0.9% in Producer Price Index for July. Retail sales rose to 0.5% in July, on the back of car sales and online promotions. This has reduced the chances of a rate cut by the Federal Open Market Committee in September. Nearly 8% of Fed fund futures now expect a status quo on rates by the FOMC in September but the rest still expect a 25-basis-point cut. 

 

Meanwhile, talks between US President Donald Trump and his Russian counterpart Vladimir Putin did not result in a ceasefire between Russia and Ukraine. However, Trump said the talks were "extremely productive."

 

Gilt and swaps may also take cues from the movement of rupee against the dollar and crude oil prices Monday. 

 

On Monday, the one-day call money rate may open near the Reserve Bank of India's repo rate of 5.50% on demand for funds from banks. The RBI will hold a three-day variable rate reverse repo auction for INR 250 billion at 0930-1000 IST. Traders were not expecting this auction, and subscription could be less ahead of goods and service tax outflows next week.

 

GOVERNMENT BONDS

On Monday, bonds may take cues from any subsequent action from the meeting between Trump and Putin that may impact tariffs on India. Any increase in government spending to support industries impacted by the US tariffs may weigh on bond prices due to fears of an increase in government borrowing. Bonds may also take cues from the movement of US Treasury yields after the release of US economic data.

 

Bonds may also take cues from the result of the INR 300-billion government switch auction. On Monday, the government will switch eight gilts worth INR 300 billion with seven longer-term papers that mature in eight to 14 years, which could put pressure on gilts of this maturity in the secondary market.

 

Traders will closely track technical levels of gilts. If sentiment worsens, traders fear that due to lack of buying interest, the 6.52-6.53% levels could be the next psychologically crucial levels to watch out for on the 10-year benchmark yield. Traders are also preparing for next week's auction. The government is scheduled to sell INR 300 billion of a 10-year gilt and INR 60 billion of a three-year gilt next week.

 

Bonds may also track the movement of crude oil prices and the rupee against the dollar. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.35-6.45%. On Thursday, the 2035 gilt ended at INR 99.49 or 6.40% yield.

 

OIS RATES

On Monday, swap rates may take cues from the movement of US Treasury yields. Traders are assessing whether India's rate-setting panel will reduce the policy repo rate further. However, the Monetary Policy Committee's pause on rates and forecasts for growth and inflation suggest a high bar for rate cuts. However, traders still see the possibility of the panel cutting rates in Oct-Dec if GDP growth surprises on the downside, particularly with the US imposing a cumulative 50% tariff on Indian goods from Aug. 27, dealers said.

 

On the liquidity front, traders have priced in overnight borrowing rates close to the repo rate. Near-term swap rates will track the movement of the overnight Mumbai Interbank Outright Rate.

 

The one-year swap rate is seen in a range of 5.45-5.56% Monday. The five-year contract is seen at 5.62-5.76%. On Thursday, the one-year swap rate ended at 5.51% and the five-year swap rate ended at 5.67%. 

 

CALL

The one-day call money rate may open near the RBI's repo rate of 5.50% on demand for funds from banks. The RBI will hold a three-day VRRR auction for INR 250 billion Monday. Traders were not expecting this auction, and subscription could be less ahead of goods and service tax outflows next week.

 

During the day, the call rate is seen in a range of 4.90-5.70%, dealers said. The two-day call rate ended at 5.00% on Saturday.

 

RBI AUCTION

--RBI to hold three-day VRRR auction for INR 250 billion at 0930-1000 IST Monday

--Govt to switch eight gilts worth INR 300 billion via auction at 1030-1130 IST Monday

 

LIQUIDITY

--Total net outflows of INR 256.56 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 7.43 billion as coupon on state bonds on Sunday

--INR 16.11 billion as coupon on state bonds on Monday

 

* Outflows

--INR 280.00 billion as payment for gilts on Monday

End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Srijita Bose

Edited by Ashish Shirke

 

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