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Informist, Thursday, Feb. 12, 2026

MUMBAI – Government bond prices are expected to open sharply higher on Friday after the government switched INR 755.04 billion of four gilts maturing in 2026-27 (Apr-Mar) with the Reserve Bank of India Thursday. In their place, the government issued INR 694.36 billion of the 8.30%, 2040 bond, the central bank said in a release after market hours.

This is the first bilateral switch between the government and the RBI since May. It will effectively bring down the government's record gross borrowing target of INR 17.20 trillion down to INR 16.44 trillion, since the government's scheduled bond redemptions in the financial year will fall.

Data released Thursday showed headline CPI inflation in the new series was in line with expectations, at 2.75%, while core CPI inflation was estimated by economists at 3.5% or lower. Retail inflation returned to the RBI's 2-6% target band for the first time since August. The central bank's Monetary Policy Committee is now seen holding the policy repo rate at 5.25% through FY27, dealers said.

Overnight indexed swap rates may fall tracking gilt yields. Significant movement in the US Treasury yields, the rupee and crude oil prices may also influence both the markets, dealers said.

On Friday, the three-day call money rate may open below the RBI's repo rate of 5.25% due to low demand for funds amid surplus liquidity in the banking system. During the day, the call money rate is expected to move in a range of 4.50-5.15%.

GOVERNMENT BONDS

Gilt prices are seen open higher Friday after the announcement of the bilateral gilt switch between the government and the RBI. The effective reduction in the gross market borrowing for FY27 is likely to spur purchases from investors, dealers said. 

The government switched INR 35.28 billion of the 7.27%, 2026 gilt, INR 349.58 billion of the 8.33%, 2026 gilt, INR 199.59 billion of the 8.15%, 2026 gilt, and INR 170.60 billion of the 8.24%, 2027 gilt. The switch took place at the indicative prices for all the bonds as on Wednesday, the RBI said. In lieu of the FY27 securities, the government issued INR 694.36 billion of the 8.30%, 2040 bond to the RBI.

This is likely to lead to robust demand for bonds at the INR-310-billion weekly gilt auction at 1030-1130 IST, especially after core CPI inflation in the new series with base 2024 was lower than expected. The government will sell INR 180 billion of a new 2031 bond and INR 130 billion of the 7.43%, 2076 gilt at auction. The short-term bond will see firm demand from banks, while pension and provident funds will likely pick up the supply of the 50-year gilt, dealers said. 

Traders do not expect further liquidity infusions or open market operations auctions to buy bonds from the RBI following comments by central bank officials after the MPC's decision last week. Traders will also track the liquidity conditions in the banking system, which rose to a six-month high of INR 3.62 trillion on Friday and has remained in hefty surplus since.

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.58-6.68% Friday. On Friday, the bond ended at INR 98.56, or 6.68% yield.

OIS RATES

On Friday, OIS rates may track the movement in government bond yields. Gilt yields are expected to fall sharply after the RBI announced it bilaterally switched INR 755 billion worth of gilts maturing in FY27 with the government, dealers said.

Short-term swap rates are expected in a narrow band following the release of CPI data Thursday. Some traders expect the Overnight Mumbai Interbank Outright Rate to rise in the near term, which could push up short-term swaps, they said. However, the five-year OIS rate is seen falling to a low of 6.02-6.03% before rising again, they said, especially if the 10-year US yield remains below the key 4.20% level. 

The one-year swap rate is seen at 5.40-5.55% and the five-year at 6.00-6.20%. On Thursday, the one-year swap rate ended at 5.51% and the five-year swap rate ended at 6.09%.

CALL

On Friday, the three-day call money rate may open below the repo rate of 5.25% due to low demand for funds amid the surplus liquidity in the banking system. During the day, the call rate is expected to move in a range of 4.50-5.15%.

Rates are seen inching up as banks look to meet cash reserve requirements at the end of the reporting fortnight, dealers said. On Thursday, the one-day call money rate ended at 4.60%.

RBI AUCTION

--Govt to sell two gilts worth INR 310 billion 1030-1130 IST

LIQUIDITY

Total net inflows of INR 7.74 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 7.74 billion as coupon on 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 Akul Nishant Akhoury

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