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Informist, Monday, Jan. 19, 2026

NEW DELHI – Government bond prices and overnight indexed swap rates are likely to take cues Tuesday from the movement of US Treasury yields in Asian trade. The 10-year US yield is being closely watched as it broke out of its five-week trading range and ended at 4.23% Friday, its highest closing level in over four months. US markets were shut Monday for Martin Luther King Jr. Day.

Later Tuesday, the state bond auction result will likely lend cues to gilt prices, dealers said. Six states will raise INR 130 billion on Tuesday, sharply lower than INR 386 billion indicated in the borrowing calendar for Jan-Mar.

Any development on the India-US trade deal may also influence bond prices and OIS rates. Significant movement in the rupee and crude oil prices may also lend cues, dealers said.

On Tuesday, the one-day call money rate may open above the Reserve Bank of India's repo rate of 5.25% due to early demand for funds. During the day, the call money rate is expected to move in a range of 4.70-5.50%, dealers said. 

GOVERNMENT BONDS

On Tuesday, gilt prices will track the movement of US Treasury yields in Asian market hours, after the 10-year US yield ended at a four-month high Friday. Later Tuesday, the state bond auction result will likely lend cues to gilt prices, dealers said.

Data released after market hours showed 'Others'--a category that includes the RBI--net purchased gilts worth INR 14.31 billion in the secondary market Monday. Some traders had speculated that the central bank had bought gilts to prevent the 10-year yield from topping the crucial 6.70% mark, but traders said the quantum was inconclusive to tell whether the RBI wanted to send a signal to keep bond yields in check.

Banks are likely to bid aggressively for state bonds at the auction due to the lower-than-indicated supply, which will likely lead to narrowing of the spread of state bonds over gilts, dealers said. The spread of 10-year state bonds over the 10-year benchmark gilt yield was 87-91 basis points at last week's auction. Six states will raise INR 130 billion on Tuesday, sharply lower than INR 386 billion indicated in the borrowing calendar for Jan-Mar. However, public sector banks might not add these bonds in their held-to-maturity books as they have nearly exhausted room for fresh supply, dealers said. 

Later this week, the INR-500-billion open market auction operation by the RBI to buy bonds on Thursday may lift prices. Thursday's auction will be the last scheduled OMO among the four announced on Dec. 23, but traders expect the RBI to announce another set of OMO purchases worth INR 1.00 trillion to INR 1.50 trillion until March.

On other hand, some traders expect bond yields to rise after Friday's weekly gilt auction and heading into the Union Budget on Feb. 1. Traders will focus on the government's gross borrowing aim in the budget, which is expected to be between INR 16 trillion and INR 17 trillion for 2026-27 (Apr-Mar), compared with INR 14.72 trillion in the current fiscal. A number higher than expected might weigh on bond prices while an increase in funding through Treasury bills or small savings and a gross borrowing number below INR 16 trillion would boost bond prices, dealers said. Bets on rate cuts at the Monetary Policy Committee's meeting in February remain muted.

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.64-6.72% Tuesday. On Monday, the gilt ended at INR 98.55, or 6.68% yield. The benchmark yield was at its highest closing level since Mar. 17.

OIS RATES

OIS rates may open steady Tuesday due to lack of domestic rate cues. The movement of US Treasury yields in Asian trade Tuesday may be closely tracked after the 10-year US yield topped 4.20% Friday, closing at its highest level in four months, dealers said.

Traders are uncertain about the direction of OIS rates, especially after the five-year OIS rose past the key 6.05% level Monday. With most traders not betting on any further rate cuts in India, benchmark OIS rates may continue to rise to fresh multi-month highs, dealers said. The RBI's Monetary Policy Committee is expected to next take action on the repo rate by raising it early in 2027.

Domestic traders are expected to pay fixed rates below the 6.00% rate on the five-year swap. However, others may unwind their paid fixed rate bets at a profit, capping the rise.

On Tuesday, the one-year swap rate is seen at 5.48-5.62% and the five-year at 5.95-6.12%. On Monday, the one-year swap rate ended at 5.57% and the five-year rate at 6.07%, both multi-month highs.

CALL

On Tuesday, the one-day call money rate may open above the RBI's repo rate of 5.25% due to early demand for funds. During the day, the call money rate is expected to move in a range of 4.70-5.50%, dealers said. 

Goods and services tax outflows are expected to drain liquidity and keep up the pressure on money market rates during the week. The RBI may conduct more short-term VRR auctions in case money market rates spike during the week, dealers said. The settlement of the central bank's open market operation to buy INR 500 billion of bonds Thursday will also add to liquidity by Friday.

RBI AUCTION

--Six states to raise INR 130 billion via bond sale at 1030-1130 IST

LIQUIDITY

Total net inflows of INR 33.26 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 13.26 billion as coupon on state bonds

--INR 20.00 billion as redemption of state bonds

* Outflows

--Nil

End

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

Reported by Aaryan Khanna

Edited by Ashish Shirke

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