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Informist, Tuesday, Mar. 24, 2026

 

NEW DELHI – Government bond prices are likely to open lower Wednesday after states announced a larger-than-expected auction for Friday, dealers said. After market hours Tuesday, the Reserve Bank of India said 12 states will raise INR 395.41 billion through bonds at 1030-1130 IST Friday, up from INR 120 billion in the indicative calendar for Jan-Mar.

 

Though traders had expected states would borrow more than the indicated number, the notified amount is larger than even the market's highest expectations of around INR 300 billion. Demand for banks for the fresh supply is expected to be muted due to a focus on credit offtake before the financial year ends on Mar. 31 next week. Moreover, investors have already absorbed INR 548.34 billion of state bonds at an auction Tuesday.

 

Overnight indexed swap rates are likely to open steady on Wednesday if there is no escalation in West Asia tensions and macroeconomic conditions remain unchanged, dealers said. Demand to hedge bond holdings may drive up swap rates Wednesday if gilt yields rise sharply. The movement in US Treasury yields and the rupee may also influence both markets.

 

On Wednesday, the two-day call money rate is likely to open above the Reserve Bank of India's repo rate of 5.25% due to liquidity deficit in the banking system after outflows for goods and services tax payments. The call money rate is seen in a range of 4.65-5.45% through the day. Money markets are shut on Thursday for Ram Navami.

 

GOVERNMENT BONDS

Bond prices are likely to open lower due to higher supply of state bonds. Bond traders will also take cues from developments in the war between the US-Israeli alliance and Iran and from their impact on Brent crude prices, dealers said.

 

News on negotiations to end the war in West Asia will likely drive gilt prices higher, especially as traders were of the view that the 10-year gilt was attractive after it closed at a 16-month high Tuesday. Continued attacks on energy infrastructure in the region – as reported on Monday and during Indian market hours Tuesday – will keep risk appetite for bonds low, dealers said.

 

Traders have begun avoiding short-term bonds due to fears of domestic rate hikes in 2026-27 (Apr-Mar) if inflation rises following the surge in global crude prices. Currently, most traders do not expect a rate hike at the next three meetings or within the next six months, but fear a lengthening of the West Asia conflict, which could bring those hikes forward, dealers said. The one-year OIS rate is pricing in two to three 25-basis-point rate hikes over the next 12 months.

 

The RBI's apparent lack of secondary-market gilt purchases, following significant activity in the first half of March, has disappointed traders. The central bank also refrained from announcing any durable measures to infuse liquidity through auction, which are seen as unlikely until at least mid-April, dealers said. After market hours Tuesday, the central bank announced it would conduct two variable rate repo auctions to supply liquidity to the banking system through the end of the financial year on Mar. 31 next week.

 

Focus will be on the government's borrowing calendar for Apr-Sept, which is likely to be released by the end of the week, dealers said. The gross market borrowing for FY27 is likely to be revised down to around INR 16.09 trillion after the government conducted gilt switches bilaterally with the RBI and in the market. These switches have all targeted bonds maturing in FY27, effectively reducing the repayment burden in the coming fiscal year and lowering gross market borrowing from the record INR 17.20 trillion announced in the Union Budget for FY27. Traders expect the first-half borrowing to be around 55% of the full-year target, with the weightage of specific tenures largely unchanged from the Oct-Mar calendar.

 

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.75-6.92% Wednesday. On Tuesday, it ended at INR 97.32 or 6.8681% yield, with the benchmark yield at its highest closing level since Nov. 22, 2024.

 

OIS RATES

Swap rates are likely to open steady on Wednesday if there's no escalation in West Asia tensions and macroeconomic conditions remain unchanged, dealers said. However, some traders expect swap rates to open lower if there are further reports on negotiations between the US and Iran to end the war in West Asia. The market will be influenced by Brent crude oil prices, US Treasury yields, and rupee movement along with developments on West Asia conflict, dealers said.

 

If offshore funds keep paying fixed rates, the rate may hit 6.55-6.62%, dealers said. If crude oil drops to near $80 per barrel, the five-year swap could ease to 6.20% due to stop-loss triggers. Some traders think rates will not revert to pre-war levels even if oil prices fall, dealers said.

 

The one-year swap rate is seen at 5.70-6.10% and the five-year at 6.40-6.65% on Wednesday. On Tuesday, the one-year swap rate ended at 5.95% and the five-year OIS rate closed at 6.50%.

 

CALL

On Wednesday, the two-day call money rate is likely to open above the RBI's repo rate of 5.25% due to demand for funds. The two-day call money rate is seen in a range of 4.65-5.45% throughout the day. Money markets are shut on Thursday on account of Ram Navami. The one-day call money rate ended at 4.80% Tuesday.

 

Dealers said systemic liquidity is seen returning to a comfortable surplus by Monday as the government spending is expected to hit the system in the form of salary and pensions next week. The liquidity surplus in the banking system is expected to rise to INR 1 trillion by the beginning of next week from INR 261.96 billion Monday. 

 

In order to provide ample liquidity to the banking system at the end of the financial year, the RBI said it will conduct two variable rate repo auctions. A six-day auction for INR 750 billion will be conducted Friday and three-day VRR tender for INR 500 billion will be held Monday.

 

RBI AUCTION

--RBI to auction 91-day T-bills worth INR 150 billion at 1030-1130 IST

--RBI to auction 182-day T-bills worth INR 120 billion at 1030-1130 IST

--RBI to auction 364-day T-bills worth INR 80 billion at 1030-1130 IST

 

LIQUIDITY

--Total net outflows of INR 518.37 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 25.46 billion as coupon on state bonds

--INR 4.51 billion as coupon on 6.01%, 2028 curve align gilt

 

* Outflows

--INR 548.34 as payment for state bond auction

 

End

 

US$1 = INR 93.87

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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