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Informist, Monday, Dec. 29, 2025

MUMBAI – Government bond prices will track the result of the INR-354.50-billion state bond auction Tuesday. Overnight indexed swap rates are seen opening steady Tuesday due to a lack of cues on interest rates. Both gilts and swaps may track the movements in US Treasury yields and crude oil prices. Movement in the rupee against the dollar in early trade may also lend cues to bond prices, dealers said. 

Traders will also monitor developments around the India-US trade deal for cues. India's advance estimate on GDP for 2025-26 (Apr-Mar) in the first week of January may also be crucial for traders to take bets on further repo rate cuts by the Reserve Bank of India's Monetary Policy Committee, though there are no rate-cut bets for February currently reflected in OIS rates, dealers said. After India's CPI for November was essentially a "non-event" for swaps, traders are focused on the CPI prints January onwards, with the RBI projecting retail inflation to average 2.9% in the March quarter. 

On Tuesday, the one-day call money rate may open above the RBI's repo rate of 5.50% due to prevailing liquidity deficit in the financial system. However, due to the two-day variable rate repo auction scheduled, rates may ease later in the day. The RBI will hold a two-day variable rate repo auction for INR 2.00 trillion at 0930-1000 IST Tuesday. The auction is likely to be subscribed for at least 70% of the notified amount, dealers said.

Inflows of INR 500 billion Tuesday due to settlement of the RBI's open market operation auction will aid the banking system liquidity. Wednesday, demand for fortnightly requirements may add to the upward pressure on rates, dealers said. During the day, the one-day call money rate is expected to move in a range of 4.70-5.65%, they added.

GOVERNMENT BONDS

On Tuesday, at open, gilts will likely track overnight movement in US Treasury yields, dealers said. Later in the day, traders will focus on the state bond auction result for further cues.

Demand at the state bond auction is likely to be subdued as traders fear an even higher quantum of state borrowing in the March quarter, as is usually seen in the last quarter of the financial year, dealers said. Higher-than-estimated cut-off yields at the state bond auction will likely drag down gilt prices in the secondary market, dealers said. Fifteen states are in line to borrow INR 345.50 billion through the issuance of bonds on Tuesday, more than double the indicated quantum of INR 153.21 billion in the Oct-Dec borrowing calendar.    

Some traders are also hopeful that the likely inclusion of Indian government bonds in Bloomberg's Global Aggregate Index in January will push bond prices higher, dealers said.

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.55-6.62%. On Monday, the 10-year benchmark bond ended at INR 99.20, or 6.59% yield.

OIS RATES

On Tuesday, swap rates may open steady Tuesday due to a lack of significant domestic interest rate cues, dealers said. The overnight movement in US Treasury yields may also lend cues. 

Trading activity is likely to be muted as several traders are on leave between Christmas and the New Year. Furthermore, foreign banks and primary dealerships, as well as traders offshore, have limited trading activity near the year-end as they have already closed their accounts, dealers said.

Market participants expect inflows into debt instruments from foreign portfolio investors to begin in the new year and to top $25 billion in 2026 as India's fully accessible route bonds are expected to be added to Bloomberg's flagship Global Aggregate Index. This may pull down swap rates as well, dealers said.

The one-year swap rate is seen at 5.40-5.52% and the five-year swap rate is seen at 5.85-6.02%. The one-year swap rate ended at 5.48% Monday. The five-year rate closed at 5.94%.

CALL

On Tuesday, the one-day call money rate may open above the RBI's repo rate of 5.50% due to the prevailing liquidity deficit in the financial system. However, due to the two-day VRR scheduled, rates may ease later in the day. The RBI will hold a two-day variable rate repo auction for INR 2.00 trillion at 0930-1000 IST Tuesday. The auction is likely to be subscribed for at least 70% of the notified amount, dealers said.

Inflows of INR 500 billion due to settlement of the RBI's OMO auction Tuesday will aid the banking system liquidity. Wednesday, demand for fortnightly requirements may add to the upward pressure on rates, dealers said. During the day, the one-day call money rate is expected to move in a range of 4.70-5.65%, dealers said. The one-day call rate ended at 5.20% Monday.

RBI AUCTION

--15 states to raise INR 354.50 billion via bond sale

--RBI to hold two-day variable rate repo auction for INR 2.00 trillion 0930-1000 IST

LIQUIDITY

Total net inflow of INR 52.00 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 10.54 billion as redemption of state bonds 

--INR 12.98 billion as coupon on state bonds 

--INR 7.09 billion as coupon on 5.91%, 2028 gilt 

--INR 21.39 billion as coupon on 6.79%, 2031 gilt

* Outflows

--INR 1.75 trillion as reversal of four-day variable rate repo tender

--INR 280.07 billion as reversal of second four-day variable rate repo tender

End

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

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

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