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Informist, Monday, Mar. 16, 2026

NEW DELHI – Government bond prices may Tuesday take direction from the overnight movement in crude oil prices and US Treasury yields as traders keep track of developments in the West Asia. The result of the state bond auction is likely to influence bond prices in the second half of the day, dealers said.

Even if crude oil prices ease, the large supply of state bonds may keep purchases in bonds limited, dealers said. Twenty-one states will raise INR 584.20 billion Tuesday, more than INR 438 billion indicated in states' indicative borrowing calendar for Jan-Mar. Most traders had expected the notified size to overshoot the indicated amount but the announced supply is larger than even those expectations, which were closer to INR 500 billion, dealers said. 

Overnight indexed swap rates may ease after the Reserve Bank of India after market hours announced it would conduct a seven-day INR-1.50-trillion variable rate repo auction Tuesday. This is likely to keep overnight money market rates capped near the repo rate, rather than peaking near the Marginal Standing Facility rate of 5.50%, dealers said. 

On Tuesday, the one-day call money rate is likely to open near the RBI's repo rate of 5.25% as the liquidity surplus in the banking system declines after payments for advance tax on personal incomes and corporations. The VRR auction is likely to keep the call money rate in check, dealers said.

GOVERNMENT BONDS

Gilt prices may Tuesday take direction from the overnight movement in crude oil prices and US Treasury yields as traders keep track of developments in West Asia. The result of the state bond auction is likely to influence bond prices in the second half of the day, dealers said.

A fall in Brent crude price below $100 a barrel may prompt a fall in the 10-year gilt yield to 6.68%, while a continued rise in the May futures contract could push the benchmark yield to 6.72%, dealers said. Losses are likely to be limited on expectations of RBI purchases in the secondary market to cap yields and add liquidity into the banking system. Trade activity in bonds is muted after the RBI bought over INR 1.5 trillion of gilts over the last two weeks, with the benchmark yield seen around 10 basis points below its fair market value, dealers said.

Traders may also be sensitive to any movement in US Treasury yields before the Federal Open Market Committee's rate decision at 2330 IST Wednesday. The US rate-setting panel is expected to hold rates, though commentary and the outlook on growth and inflation after the US-Iran war broke out will be in focus, dealers said.

The RBI's announcement of a seven-day INR-1.5-trillion variable rate repo auction may aid demand for short-term bonds Tuesday after they fell sharply Monday, dealers said. This is the first VRR auction the central bank will conduct since Jan. 30. Any significant movement in the rupee against the dollar and overnight indexed swap rates will also lend cues to bond prices during the day. The 10-year benchmark 6.48%, 2035 bond is seen in the 6.65-6.75% range Tuesday. On Monday, the benchmark bond ended at INR 98.42 or 6.7059% yield.

OIS RATES

Tuesday, swap rates will track overnight borrowing rates and any announcement of measures to infuse liquidity in the banking system by the RBI, dealers said. Swaps maturing up to six months may fall after the RBI said it would conduct a seven-day INR-1-trillion VRR auction at 0930-1000 IST Tuesday. This is likely to bring down the Mumbai Interbank Outright Rate--the floating leg of the OIS contract--to near the repo rate from 5.38% Monday.

As seen so far this month, swaps will also track Brent crude oil prices for May delivery amid the West Asia war. Traders will also track US Treasury yields as the US Federal Open Market Committee's two-day meeting kicks off Tuesday, wherein traders expect a status quo on rates.

Depending on the movement of Brent crude prices, the five-year swap could rise to 6.55-6.62% if offshore funds continue to pay fixed rates, dealers said. While the spread between gilts and swaps is lucrative to receive fixed rates, any stop-losses hit may lead to unwinding of these spread trades, dealers said. In the longer run, the inverted spread is expected to correct, especially since bond yields are seen rising due to the onset of fresh supply in April. If crude oil futures fall back to around $80 a barrel, the five-year swap could ease to as low as 6.15% as stop-losses will be triggered on paid fixed-rate bets, dealers said.

Swap rates maturing in up to one year may also be volatile as traders bet on whether higher inflation or lower growth will tip the votes of the Monetary Policy Committee members on further rate action. The RBI is seen providing ample liquidity to the banking system for transmission of monetary policy after the 125 bps of rate cuts in 2025. Significant movement in the rupee may also lend direction, dealers said.

The one-year swap rate is seen at 5.62-6.00% and the five-year at 6.15-6.62%. On Monday, the one-year OIS rate ended at an over 11-month high of 5.84%. The five-year swap rate ended at 6.43%, its highest closing level since Jul. 3, 2024.

CALL

On Tuesday, the one-day call money rate is likely to open near the RBI's repo rate of 5.25% as the liquidity surplus in the banking system declines after payments for advance tax on personal incomes and corporations. The one-day call money rate is seen in a range of 4.75-5.45% through the day.

The first VRR auction since Jan. 30 will likely keep the call money rate capped near the RBI's repo rate. The auction will only reverse after the goods and services tax outflows conclude and is likely to be heavily subscribed, dealers said. More liquidity infusion measures are expected to ease money market rates near the quarter- and financial year-end in March. On Monday, the one-day call rate ended at 5.35%, a six-week high.

LIQUIDITY

--Total net inflows of INR 59.12 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 14.47 billion as coupon on state bonds

--INR 5.00 billion as redemption of state bonds

--INR 39.65 billion as coupon on 6.68%, 2031 gilt

* Outflows

--Nil

End

US$1 = INR 92.42

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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