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Informist, Tuesday, Jan. 27, 2026

By Janwee Prajapati

MUMBAI – Government bond yields jumped Tuesday and the 6.48%, 2035 yield hit 6.7198% nearing the end of trade, the highest for a 10-year benchmark gilt so far in the current financial year. The 10-year benchmark yield surpassed its previous FY26 high of 6.70% during the session, on short sales by domestic traders and tracking a rise in the five-year overnight indexed swap rate, dealers said. Trade volumes were thin amid low risk appetite and caution ahead of the Union Budget for the financial year 2026-27 (Apr-Mar) to be presented Sunday.

The 6.48%, 2035 gilt closed at INR 98.30, down from INR 98.69 Friday. The bond's yield ended at 6.7194%--the highest closing level for a 10-year benchmark gilt since Mar. 4--against 6.6635% Friday. The Indian financial markets were shut Monday for Republic Day. The five-year OIS rate ended at 6.18%, its highest closing level since Jan. 21, 2025.

"It seems like an FPI-driven (foreign portfolio investor-driven) move today (Tuesday), they are hitting OIS, and whichever domestic trader is getting hit has to hedge by selling liquid 10-year (6.48%, 2035 gilt) so people have to short (short-sell gilts)," a dealer at a private-sector bank explained. "Anyway, the 10-year (gilt) auction is there on Friday, it's such a huge amount that everyone will be able to cover (their short bets) there." 

The government will sell INR 320 billion of the 6.48%, 2035 bond at the weekly gilt auction Friday. The large quantum of supply in the 10-year benchmark bond pushed its yield up as traders placed short bets to make space in their portfolios for the fresh supply, dealers said.

Traders hit stop-losses as the yield on the 10-year benchmark rose past the psychologically crucial 6.70% level to near 6.72%. Bond yields rose tracking a sharp rise in OIS rates as offshore traders likely paid fixed rate contracts, dealers said. Some traders speculated that FPIs were selling gilts. As of 1813 IST, FPIs had net sold gilts worth INR 2.56 billion through the fully accessible route Tuesday, as per data from Clearing Corp. of India.

The rise in bond yields was limited as public-sector banks likely bought gilts at levels seen to be lucrative, at and above the 6.70% yield on the 10-year benchmark. However, the purchases were not aggressive as these banks likely refrained from adding to their portfolios ahead of the Union Budget, dealers said. In the secondary market, mutual funds likely sold gilts as they preferred investing in equities, dealers said. 

At the state bond auction, public-sector banks likely bought state bonds maturing in up to eight years for their held-to-maturity books to capture the high yields, dealers said. However, they refrained from picking up state bonds maturing in more than 15 years amid reduced preference for longer-term maturities due to low risk appetite.

At the auction, the RBI set cut-off yields on states' 10-year bonds between 7.47% and 7.59%, against an expectation of 7.48-7.54%, according to the median of an Informist poll. The RBI set a cut-off yield of 7.57% on Tamil Nadu's 7.58%, 2056 bond reissue, against an expectation of 7.62%. The bond was mopped up in just three bids, likely from insurance companies and pension funds, dealers said. Maharashtra did not accept any bids for its 7.48%, 2045 bond reissue. Gilt yields changed little after the auction result as the cut-off yields were broadly in line with expectations, dealers said. 

Gilt yields recovered from an early fall on profit-taking, likely by private-sector banks and mutual funds. Bond yields had opened lower after the RBI announced measures to infuse liquidity after market hours Friday. However, traders had expected such an announcement and priced it in, dealers said. Some traders said the announcement of a 90-day variable rate repo auction indicated the end of the RBI's Monetary Policy Committee's rate-cutting cycle, since its tenure crosses the February policy meeting and is likely to include the April policy meeting as well.

"Selling is across market segments, not from any particular segment," a dealer at a primary dealership said. "...some people still had some expectation of a rate cut, but after the VRR and buy/sell swap announcement, nobody expects a rate cut anymore... RBI usually avoids such long-term VRRs. Trade deal with the European Union is also weighing."

Turnover in the gilts market Tuesday was INR 381.20 billion, down from INR 484.55 billion Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There was no trade using the RBI's wholesale e-rupee pilot for at least the eleventh successive session.

OUTLOOK

Wednesday, bond yields may open lower after the RBI advanced the dates of two open market operation auctions it had announced Friday by a week. In a release after market hours, the RBI said it would hold two OMO auctions of INR 500 billion each Thursday and Feb. 5, instead of Feb. 5 and Feb. 12. Some traders had hoped for an OMO auction this week, but the RBI had scheduled both OMO auctions for next month.

The RBI has chosen to buy the 6.75%, 2029; the 7.17%, 2030; the 7.95%, 2032; the 7.26%, 2033; the 6.22%, 2035; the 7.18%, 2037; and the 7.30%, 2053 gilts at Thursday's auction. The 6.33%, 2035 bond yield may open higher Wednesday as several traders were hoping the RBI would include it at the OMO auction. Contrary to traders' expectations, the RBI also has not chosen to purchase state bonds at the OMO auction. Bond traders may also track the result of the INR 290-billion Treasury bill auction after cut-off yields were at multi-month highs last week.

Traders are keenly tracking the Union Budget for FY27, to be presented Sunday. The Centre's gross borrowing aim is expected to be between INR 16 trillion and INR 17 trillion, compared with INR 14.72 trillion for FY26. A number higher than expected may 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. If the actual amount is significantly higher than INR 17 trillion then the yield on the 10-year benchmark bond will likely rise till 6.80%, dealers said.

Gilts may also be influenced by the movement in US Treasury yields ahead of the US Federal Open Market Committee's meeting outcome. Any development on the India-US trade deal may also influence bond prices. Significant movement in the five-year OIS rate, the rupee, and crude oil prices may also lend cues, dealers said. The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.65-6.75%.

India Gilts: Slump; stop-losses triggered as 10-yr benchmark yld tops 6.70%

MUMBAI--1552 IST--Prices of government bonds slumped as the yield on the 6.48%, 2035 gilt rose above the psychologically crucial 6.70% level, the highest yield for a benchmark 10-year gilt so far this financial year. The yield hit 6.7140% Tuesday, the highest since Mar. 5, as traders hit stop-losses when the 10-year yield rose above 6.70%, dealers said. A rise in the five-year overnight indexed swap rate to the key 6.17% level--its highest in over a year--weighed on bond prices. State-owned banks--which usually purchase gilts at levels seen lucrative when bond prices fall--refrained from aggressive purchases due to risk of a further rise in bond yields, dealers said. 

Traders were short-selling gilts, especially the 6.48%, 2035 bond ahead of INR 320 billion of its fresh supply Friday. Some foreign portfolio investors were also selling gilts, dealers said. As of 1552 IST, FPIs net bought gilts worth INR 865.20 million through the fully accessible route, as per data from Clearing Corp. of India. Offshore traders were paying fixed rate contracts in swaps, while likely selling gilts, dealers said.  

"Gradually, we've been seeing the (trading) range move upwards only. So, it's not much of a surprise. It (yields) can go still further up before Budget (Union Budget for FY27). Now there's a 10-year auction this week, so why would PSUs (state-owned banks) want to buy in secondary right now?" a dealer at a state-owned bank said. The government will sell INR 320 billion of the 6.48%, 2035 bond Friday. The presence of state-owned banks was also less in the secondary market since some banks had skeletal staffing due to the nationwide strike called by the United Forum of Bank Unions, some dealers said. 

Bond prices were little changed after the state bond auction result was largely along expected lines, dealers said. Fifteen states raised INR 383 billion at the bond auction, against a notified amount of INR 398 billion.  

"Broadly, the fall seems to be because of OIS, and there's also some disappointment in market after what RBI announced, some people were expecting an OMO in January itself, and a bigger quantum," a dealer at a small finance bank said. Post market hours Friday, the central bank announced measures to infuse liquidity, including two open market operation auctions totalling INR 1.00 trillion to be held in February. 

At 1552 IST, the turnover in the gilt market was INR 320.70 billion, slightly lower than INR 379.70 billion at 1530 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, the yield on the 10-year benchmark 6.48%, 2035 bond is seen at 6.68-6.75%.  (Cassandra Carvalho)

India Gilts: Slide ahead of fresh supply, lack of positives before Budget

NEW DELHI--1330 IST--Government bond prices fell sharply as traders made room for the fresh supply at the state bond auction Tuesday and weekly gilt auction Friday. There was lack of buying interest as there were no positives to look forward to before the Union Budget for 2026-27 (Apr-Mar) on Sunday, dealers said.

Some traders were expecting the Reserve Bank of India to conduct more open market operations to buy gilts before the Budget announcement. Others were also expecting state bonds to be included in the RBI's next round of purchases. However, the first OMO auction will be held on Feb. 5 and both auctions worth INR 1-trillion announced for February so far will only include gilts, according to the RBI's announcement Friday.

Traders had already positioned for the RBI to announce more OMOs of INR 1.0 trillion to INR 1.5 trillion and booked profits early in the day. With bond prices failing to sustain gains in early trade, traders who had expected to sell bonds at higher prices also shed their holdings near Friday's closing levels, looking to make room for the INR 398-billion state bond auction ahead of its result.

Moreover, traders short-sold the 6.48%, 2035 gilt before the weekly gilt auction on Friday, which will feature INR 320 billion of the 10-year benchmark gilt. Despite the build-up of short sales already, traders said there was little risk of not being able to cover the bond at auction, dealers said.

A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the ClearCorp Repo Order Matching System. Data at 1330 IST showed trades worth nearly INR 120 billion in the 6.48%, 2035 bond, with another INR 138.28 billion in the erstwhile 10-year 6.33%, 2035 gilt.

"Neither I nor you know whether the PSU (public sector) banks selling bonds at OMO will replace it 1-to-1," a dealer at a private sector bank said. "What we do know is now the RBI will not be doing any more announcements in the next 15 days and that Budget and the 10-year auction is coming, so it is not in anyone's interest to buy right now."

Some state-owned banks were buying bonds as the 10-year benchmark yield rose to near 6.70%, its highest level so far in the current fiscal. However, some traders were betting on the yield to rise above the key level even before the Budget due to the heavy supply of the 6.48%, 2035 bond at the weekly auction. Bond prices may also recover after the auction result on Friday, with follow-on buying from traders seen limited even after the state bond auction result Tuesday, dealers said.

Demand for long-term bonds at the state bond auction held from 1030-1130 IST was expected to be robust due to likely purchases from pension funds, dealers said. Bonds maturing in under 10 years also found traction from banks and mutual funds but traders had demanded higher yields at the auction due to its significant size. Traders now expect weekly auctions of between INR 300 billion and INR 400 billion in the coming weeks, which is likely to lead to a steady increase in the spread of state bond cut-off yields over gilts of similar tenures, dealers said.

At 1330 IST, the turnover in the gilt market was INR 192.95 billion, lower than INR 230.85 billion at the same time Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, the yield on the 10-year benchmark 6.48%, 2035 bond is seen at 6.64-6.72%.  (Aaryan Khanna)

India Gilts: Erase gains on profit booking; heavy state bond supply weighs

MUMBAI--1015 IST--Prices of government bonds erased gains and fell as traders booked profits after the rise in prices at the open, dealers said. Traders also avoided picking up gilts before the INR 398-billion state bond auction at 1030-1130 IST, with caution also ahead of the weekly gilt auction on Friday and the Union Budget for 2026-27 (Apr-Mar) on Sunday.  

Traders had already placed bets that the Reserve Bank of India would announce liquidity infusion measures and the amount of open market gilt purchases, at INR 1 trillion until Feb. 12, was in line with expectations rather than exceeding them, dealers said. This led to a spate of profit booking, likely from private sector banks and mutual funds.

Some traders were also disappointed that the central bank had announced other measures to infuse liquidity, which is seen limiting the scope of further open market operations to buy bonds, dealers said. The central bank will also conduct a 90-day variable rate repo auction for INR 250 billion on Friday and a $10-billion, three-year dollar-rupee buy-sell swap auction next week, it announced after market hours Friday.

"Opening should have been flat but it (bond prices) open up, so the prices got corrected," a dealer at a private sector bank said. "...There was no reason for a higher opening, OMO (quantum) was along expected lines only and due to this buy/sell swap and VRR people are now expecting a status quo in the next policy."

Overnight index swap rates eased after the liquidity infusion measures on the view that the overnight Mumbai Interbank Outright Rate would now be more consistently set near the repo rate, after being higher since Dec. 15. The three-month and one-year OIS rate were down 4 basis points at 5.41% and 5.56%, respectively, while the five-year fell to as low as 6.11% from 6.14% Friday. However, traders widely expect the RBI's Monetary Policy Committee to maintain a status quo on the repo rate in February and OIS rates do not show any signs of policy rates easing in 2026.

At the state bond auction Tuesday, traders will likely bid at higher yields following the huge supply of these bonds which will likely lead to widening of spread between gilts and state bonds of similar maturity, dealers said. Fifteen states will raise INR 398 billion through bonds. Despite being smaller than the indicative amount for the week in the Jan-Mar calendar, the quantum is sharply higher than the INR 130 billion of supply last week and more than the INR 350 billion that traders were expecting. 

The price movements in gilts were magnified in early and thin trade but traders did not have an appetite to buy bonds before the state bond auction Tuesday as well as the INR 320-billion sale of the 10-year benchmark 6.48%, 2035 gilt at auction Friday, dealers said. Traders are also focused on the borrowing quantum to be announced in the Budget, which is expected to be between INR 16 trillion to INR 17 trillion. If the borrowing quantum is higher than INR 17 trillion, the yield on the 10-year benchmark bond will likely rise past the crucial 6.70% mark, which is unlikely to break this week, dealers said.

At 1017 IST, the turnover in the gilt market was INR 77.60 billion, against INR 86.45 billion at 1035 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 10-year benchmark 6.48%, 2035 bond is seen at 6.60-6.70% for the rest of the day.  (Janwee Prajapati)

India Gilts: Seen up after RBI announces INR 1-tln OMO buys until Feb 12

NEW DELHI – Government bond prices are seen higher after the Reserve Bank of India announced further measures to infuse durable liquidity into the financial system, including by buying bonds through open market operation auctions in February, dealers said. Traders may be cautious in placing aggresive bets in the holiday-shortened week and before the Union Budget for 2026-27 (Apr-Mar) on Feb. 1. 

The 10-year benchmark 6.48%, 2035 bond is seen in the range of 6.60-6.68% yield after ending at INR 98.69, or 6.66% yield on Friday. India's financial markets were shut Monday for Republic Day. Though traders were optimistic of further OMO announcements, bond prices slid near the end of trade Friday after data showed the RBI did not buy any gilts in the secondary market in the Jan. 16 week, as widely anticipated.

However, the RBI after market hours Friday announced it would buy INR 1 trillion of gilts through two OMOs of INR 500 billion each on Feb. 5 and Feb. 12, in line with market expectations brewing before the close of trade. The central bank will also conduct a 90-day variable rate repo auction for INR 250 billion on Friday and a $10-billion, three-year dollar-rupee buy-sell swap auction next week.

Gains may be bolstered by a slight fall in US Treasury yields after firm demand for two-year bonds at auction and signs of easing tensions between the world's largest economy and its top trading partners – Canada and Europe. The yield on 10-year US Treasury note fell to 4.22% at 0820 IST from 4.24% at the end of Indian market hours Friday. The movement in the rupee may also lend cues to gilts during the day, dealers said.

Bond prices may also take cues from the state bond auction result Tuesday, dealers said. Fifteen states aim to raise INR 398 billion through bonds at auction 1030-1130 IST, against INR 473 billion indicated for this week in the borrowing calendar for Jan-Mar. However, traders had expected state borrowing to be under INR 350 billion this week and bond prices had fallen Friday after the state auction was announced.

Dealers said the RBI's liquidity injection would only prevent the yield on the 6.48%, 2035 bond beyond 6.70% until the Budget and prices may not jump before the government unveils its borrowing plans. The Centre's gross borrowing target is expected to be between INR 16 trillion and INR 17 trillion, compared with INR 14.72 trillion for FY26. A number higher than expected may 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 February meeting next week remain muted. Some traders said the central bank's willingness to conduct a 90-day VRR auction suggested it would not cut rates in the next two policy reviews, after 125 basis points of repo rate cuts between February and December 2025 to 5.25%.  (Aaryan Khanna)

End

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

Edited by Rajeev Pai

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