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Informist, Saturday, Jan. 3, 2026

 

MUMBAI - On Monday, government bond prices are seen opening sharply lower due to heavy state borrowing of INR 5.00 trillion scheduled in the March quarter, the highest borrowing by states announced for a single quarter. Overnight indexed swap rates are seen tracking the movement of bond yields. Trade volumes are expected to revive next week with the return of several foreign banks and offshore traders from the New Year holiday, dealers said.

 

The rupee's movement against the dollar in early trade will also provide cues for bond prices, as will the movement in US Treasury yields and crude oil prices. Crude oil prices are seen rising after US President Donald Trump said that the US launched a "large-scale strike" on Venezuela, including in the capital Caracas. Trump said the US captured Venezuela

President Nicolas Maduro, and his wife, who have been "flown out of the country".

 

The government's first advance estimate of GDP for 2025-26 (Apr-Mar) on Wednesday may also lend cues on interest rates next week, dealers said. Developments in the India-US trade deal negotiations may also influence bond prices.

 

The government bond and OIS markets are shut Saturdays. On Monday, the one-day call money rate may open near the Reserve Bank of India's repo rate due to early demand for funds, especially from primary dealerships, as liquidity is expected to remain tight unless a significant chunk of inflows from the Centre's expenditure are complete, dealers said. If there is a large quantum of inflows from the Centre's month-end expenditure, combined with the central's bank variable rate repo auction Monday, rates may fall below repo later in the day.

 

GOVERNMENT BONDS

Gilt prices are seen plunging Monday after the RBI, post market hours Friday, said states plan to raise INR 5 trillion through bonds in Jan-Mar, the higher end of traders' expectations. Traders expect the 10-year benchmark yield to open around 5 bps higher, nearing 6.70%--the highest yield so far in the financial year ending March, which is a level that dealers expect the central bank to be uncomfortable with. The fall in prices may be mildly offset, however, after RBI data showed that the central bank bought gilts worth INR 41.55 billion onscreen Dec. 23, the day the 10-year benchmark yield rose to 6.70%.

 

Nine states aim to raise a heavy INR 301 billion through bonds Tuesday, most of them maturing in 10-20 years, tenures traders are not comfortable holding. This may further weigh on government bond prices.

 

Traders will also track the result of the INR 500-billion OMO auction Monday. The central bank will buy the 7.10%, 2029; the 7.95%, 2032; the 7.73%, 2034; the 7.40%, 2035; the 7.41%, 2036; the 8.30%, 2040; and the 7.09%, 2054 bonds at the auction. Traders do not favour these bonds much. Foreign banks are likely to front-run the likely announcement of India bonds' inclusion in the Bloomberg Global Aggregate Index in January.

 

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.57%-6.70% Monday. On Friday, the 6.48%, 2035 bond ended at INR 99.09, or 6.61% yield.

 

OIS RATES

On Monday, swap rates may track the movement of bond yields. Foreign banks, primary dealers, and offshore traders are expected to receive swap rates this month, dealers said. Market participants expect inflows into debt instruments from foreign portfolio investors to begin in the new year and to exceed $25 billion in 2026 as India's fully accessible route bonds are expected to be added to Bloomberg's flagship Global Aggregate Index.

The one-year swap rate is seen at 5.40-5.52% Monday and the five-year at 5.85-6.02%. The one-year rate Friday ended at 5.48% and the five-year rate closed at 5.96%.

 

CALL

On Monday, the one-day call money rate may open near the RBI's repo rate due to early demand for funds, especially from primary dealerships, as liquidity is expected to remain tight unless a significant chunk of inflows from the Centre's expenditure are complete, dealers said. If there is a large quantum of inflows from the Centre's month-end expenditure, combined with the central's bank variable rate repo auction Monday, rates may fall below repo later in the day.  

 

On Monday, the RBI will hold an overnight variable rate repo auction of INR 500 billion at 0930-1000 IST. Systemic liquidity is seen returning to a comfortable surplus only by mid-January, after two tranches of open market operation auctions add INR 1 trillion of liquidity by Jan. 12 and a three-year $10 billion dollar-rupee buy-sell swap auction on Jan. 13 that will add to durable liquidity. That may cause the central bank to begin conducting variable rate reverse repo auctions soon, dealers said. During the day, the one-day call money rate is expected to move in a range of 4.70-5.50%, dealers said. The two-day call rate ended at 4.75% Saturday.

 

RBI AUCTION

--RBI to hold overnight variable rate repo auction for INR 500 billion 0930-1000 IST Monday

--RBI to buy INR 500 billion of seven gilts via open market operation auction Monday 

 

LIQUIDITY

Total net outflows of INR 298.37 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 8.15 billion as coupon on state bonds on Sunday

--INR 13.47 billion as coupon on state bonds on Monday

 

* Outflows

--INR 320.00 billion as payment for gilts on Monday

 

End

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

 

Reported by Cassandra Carvalho

Edited by Vandana Hingorani

 

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