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Informist, Thursday, Sept. 25, 2025

MUMBAI – Government bond prices and overnight indexed swap rates are likely to take cues from the US Treasury yields at open Friday. Gilts may also take cues from the results of the INR-320-billion gilt auction later in the day, dealers said. 

US government data released after Indian market hours showed that US GDP grew 3.8% in Apr-Jun, higher than 3.3% estimated earlier. Moreover, US initial jobless claims fell by 14,000 on week to 218,000, lower than expected and the second straight week with a sharp fall. The 10-year US Treasury yield rose to as high as 4.20% after the data, from 4.16% at 1700 IST, as traders pared bets on a rate cut by the US Federal Reserve.

Caution before the three-day Reserve Bank of India's Monetary Policy Committee meeting that starts Monday may limit volatility in gilts and swaps Friday, dealers said. Traders may place their bets ahead of the Oct-Mar gilts borrowing calendar. The calendar is likely to be released after market hours Friday, according to an Informist report, quoting a senior finance ministry official. Swaps may take cues from the movement in gilt yields during the day. 

Traders may take cues from any developments on US tariffs on Indian goods. Gilts and swaps may also track the movement in crude oil prices and the rupee against the dollar.

The three-day call money rate is expected to open below the RBI's repo rate on Friday, driven by low funding ahead of month-end inflows. However, rates may ease further later in the day as the RBI conducts a four-day variable rate repo auction for INR 1.00 trillion at 0930 IST to 1000 IST. The one-day call rate closed at 5.00% on Thursday.

GOVERNMENT BONDS

On Friday, bond prices may fall due to a rise in US Treasury yields after key economic data in the world's largest economy. The fall may be amplified ahead of the weekly gilt auction at 1030-1130 IST, dealers said.

Traders may also place short bets on gilts ahead of the weekly gilt auction, dealers said. The government will sell INR 160 billion each of the 6.68%, 2040 gilt and 6.90%, 2065 gilt at auction Friday. Demand is expected to be firm in the last gilt auction of Apr-Sept as the government is expected to reduce the supply share of long-term bonds in Oct-Mar, dealers said.

As caution sets in before the three-day MPC meeting starting Monday, traders are seen preferring the liquid 10-year benchmark bond over the relatively illiquid bonds, dealers said. Traders will also place their bets ahead of the Oct-Mar borrowing calendar. 

Bond traders expect the government to reduce the share of bonds maturing in 30 to 50 years in the Oct-Mar calendar by 3-5%, from 35% in Apr-Sept, following market feedback and poor demand from institutional investors. It may increase the share of borrowing in bonds maturing up to 10 years, market participants said. The once-in-four-week auction cycle for a particular bond is expected to remain unchanged, and no new tenure of issuance is expected to be added.

However, positive sentiment may push prices up later in the day as traders are optimistic the RBI's rate-setting panel could open the door to further rate cuts next week, either by raising concern about India's growth prospects amid external headwinds or cutting the CPI inflation forecasts further.

Traders may refrain from aggressively placing bets ahead of the release of the gilt borrowing calendar for Oct-Mar, seen as the next cue for the market. However, purchases of longer-term bonds may pick up on the expectation of lower supply in the segment in the second half of the financial year, dealers said. 

Traders may also take cues from developments in the India-US trade talks. Bond traders may also track the movement of crude oil prices. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.42-6.54%. On Thursday, 2035 gilt closed at INR 98.81, or a yield of 6.50%. 

OIS RATES

On Friday, swap rates may open steady due to caution before the MPC begins its three-day policy review Monday, dealers said. Any sharp movement in US Treasury yields may lend cues, though the impact is likely to be muted ahead of the key domestic event.

Traders are now pricing in at least one more rate cut in India. Offshore traders have been largely absent from the swaps market for the past two days but may receive fixed rates and put downward pressure on swap rates, with domestic traders also amping up their bets in the run-up to the domestic policy review next week, dealers said.

Traders may also track the movement of gilt yields ahead of the release of the Centre's Oct-Mar borrowing calendar. Traders have recently been unwinding their bond swap traders as spreads between the two instruments compressed.   

Traders may take cues from geopolitical developments, especially on US tariffs on Indian goods. Swaps may also track the movement of crude oil prices and the rupee against the dollar. The one-year swap rate is seen in the range of 5.40-5.55% and the five-year contract at 5.62-5.80%. On Thursday, the one-year swap rate ended at 5.46% and the five-year swap rate ended at 5,73%. 

CALL

On Friday, the three-day call money rate is likely to open below the RBI's repo rate due to low funding needs ahead of month-end inflows. On Thursday, the one-day call rate ended at 5.00%. 

RBI AUCTION

--RBI to hold overnight VRR auction for INR 1.25 trillion

--Govt to auction two gilts worth INR 320 billion on Friday 

LIQUIDITY

--Total net inflows of INR 43.60 billion. The calculation of flows does not take into account redemption of the standing deposit facility and scheduled variable rate repo and variable rate reverse repo operations.

* Inflows

--INR 43.05 billion as coupon on state bonds    

* Outflows

--INR 690.60 billion as reversal of one-day VRR auction tender

End

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

Reported by Vaishali Tyagi

Edited by Akul Nishant Akhoury

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