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Informist, Wednesday, Feb. 4, 2026

MUMBAI – On Thursday, government bond prices may open higher and overnight indexed swap rates may open lower, as surplus liquidity in the banking system is expected to be ample, dealers said.

Traders will also closely track the systemic liquidity and any indications of liquidity infusion from the Reserve Bank of India. Bonds and swaps may also track overnight movement of US Treasury yields, though the impact of the offshore cue may be limited as traders focus on the India-US trade deal and the outcome of the Reserve Bank of India's Monetary Policy Committee meeting this week, dealers said. Traders do not expect the rate-setting panel to cut rates further, after cutting the repo rate by 25 basis points to 5.25% in December.

Several participants see the terminal repo rate at 5.25%, with the MPC likely to opt for a "prolonged pause". Given the disruption in global trade and geopolitical conflicts even after the trade deal, the MPC is unlikely to change its stance to "accommodative" after reverting to "neutral" in June, participants said. While nothing of significance is expected on the interest rate front, the focus is on the central bank's communication on liquidity at the post-policy announcement. Crude oil prices, the rupee's movement against the dollar, and geopolitical tensions may influence bond prices and swap rates.

The movement of the five-year OIS rate will also lend cues, with traders expecting it to fall to 6.00% by Friday. Traders await details of the India-US trade deal to gauge its impact on inflation and growth.

Money market rates will also be closely tracked after the weighted average call rate Wednesday ended at its lowest since Aug. 4, 2022, barring Saturdays. The 10-year benchmark gilt yield may rise to 6.75% if the RBI conducts a variable rate reverse repo auction this week, dealers said.

On Thursday, the one-day call money rate may open below the RBI's repo rate of 5.25% on surplus liquidity and lack of major scheduled outflows this week. Liquidity is seen increasing by Friday, after the RBI conducts an INR-500-billion open market operation auction Thursday, and the first-leg settlement of the $10 billion, three-year dollar-rupee buy-sell swap auction conducted Wednesday takes place.

Traders will watch out for any announcement of a VRRR. On Friday, traders will track the decision of the MPC. Traders do not expect a rate cut but expect assurance from the RBI that it will continue to provide sufficient liquidity to the banking system. Some traders also expect the RBI to announce a relaxation in liquidity coverage ratio norms, dealers said. The call rate is likely to move in the range of 4.40-5.20% during the day, dealers said.

GOVERNMENT BONDS

Thursday, bond prices are likely to open higher and the 10-year benchmark gilt yield is likely to fall to the key level of 6.68% if cut-off prices at the INR 500-billion OMO auction are set higher than indicated by Financial Benchmarks India Pvt. Ltd., dealers said. The RBI has offered to buy seven bonds--the 6.75%, 2029; the 6.28%, 2032; the 7.18%, 2033; the 6.79%, 2034; the 6.33%, 2035; the 6.92%, 2039; and the 7.09%, 2054.

Traders will watch out for purchases by foreign investors after those through the fully accessible route hit a record high Wednesday.

Traders expect the yield on the 10-year benchmark gilt to fall to 6.68% before rising again on concern of heavy bond supply in FY27, dealers said.

Some traders were expecting the RBI to announce more OMO auctions of INR 1 trillion to INR 1.5 trillion in February, with the number potentially rising to INR 2 trillion by the end of the March quarter. Those bets were pared after the India-US trade deal, dealers said. Some traders expect RBI Governor Sanjay Malhotra to signal scope for further softening of monetary policy, while emphasising that the central bank will continue to provide liquidity to the banking system. Some traders also expect the RBI to announce a relaxation in liquidity coverage ratio norms, which could negatively impact bond prices, dealers said. The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.62-6.76%. On Wednesday, the bond ended at INR 98.46, or 6.70% yield.

OIS RATES

On Thursday, traders may continue to receive fixed rates due to heavy surplus liquidity and low Mumbai Interbank Offered Rate rates, dealers said. Offshore investors and traders are also expected to continue receiving fixed rates after India and the US agreed to a trade deal, boosting demand for Indian assets.

However, a fall in the five-year OIS rate below 6.05% may not come about before the RBI's commentary on liquidity management at the outcome of the Monetary Policy Committee meeting Friday. Some traders also fear the RBI will push the MIBOR rate higher from its current three-year low by conducting a variable rate reverse repo operation. The one-year swap rate is seen at 5.40-5.60% and the five-year at 6.00-6.20%. Wednesday, the one-year swap rate ended at 5.51% and the five-year swap rate ended at 6.08%.

CALL

On Thursday, the one-day call money rate may open below the RBI's repo rate of 5.25% on surplus liquidity and lack of major scheduled outflows this week. Liquidity is seen increasing by Friday, after the RBI conducts an INR-500-billion open market operation auction Thursday, and the first-leg settlement of the $10 billion, three-year dollar-rupee buy-sell swap auction conducted Wednesday takes place.

Traders will watch out for any announcement of a VRRR. On Friday, traders will track the decision of the RBI's Monetary Policy Committee. Traders do not expect a rate cut but expect assurance from the RBI that it will continue to provide sufficient liquidity to the banking system. Some traders also expect the RBI to announce a relaxation in liquidity coverage ratio norms, dealers said. The call rate is likely to be in the range of 4.40-5.20% during the day, dealers said. The one-day call rate closed at 5.10% Wednesday.

RBI AUCTION

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

LIQUIDITY

Total net outflows of INR 123.65 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 77.00 billion as redemption of INR 182-day Treasury bills

--INR 81.61 billion as redemption of INR 364-day T-bills

--INR 23.79 billion as coupon on state bonds

--INR 585.60 million as coupon on 6.90%, 2034 green bond

--INR 52.47 billion as coupon on 7.09%, 2054 bond

* Outflows

--INR 114.40 billion as payment for 91-day T-bills

--INR 137.00 billion as payment for 182-day T-bills

--INR 107.70 billion as payment for 364-day T-bills

End

US$1 = INR 90.43

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

Reported by Cassandra Carvalho

Edited by Ashish Shirke

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