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Informist, Wednesday, Mar. 25, 2026

NEW DELHI – Friday, government bond prices and overnight indexed swap rates will closely track developments in the West Asia war between the US-Israel combine and Iran. The impact of those developments on crude oil prices will guide both markets as traders gauge the timeline of further rate action in India, dealers said.

A state bond auction that was revised higher after market hours on Wednesday may weigh on gilt prices and the rise in bond yields may drive up swap rates as investors hedge their bond holdings, dealers said. The Reserve Bank of India Wednesday said 13 states will raise INR 429.41 billion through bonds Friday, up from 12 states and INR 395.41 billion.

Money markets are shut for Ram Navami Thursday. US Treasury yields and the rupee will also influence both markets.

On Friday, the three-day call money rate is likely to open above the RBI's repo rate of 5.25% due to demand for funds early in the trade. The call rate is seen in the 4.60-5.25% range through the day.

GOVERNMENT BONDS

On Friday, developments in the war in West Asia and its impact on crude oil prices will be the foremost trigger for bonds. If there is a breakthrough in talks between the US and Iran on a ceasefire, Brent crude futures are seen falling to $85 a barrel and the 10-year gilt's yield may recover to 6.80% as state-owned banks step up purchases. However, if Brent remains above $100 a barrel and there is no certainty on further developments in the war, traders expect bond yields to remain at current levels, which are the highest in over a year.

Some banks may step up purchases of the 10-year benchmark gilt to improve its valuation in their portfolios near the quarter- and financial year-end on Tuesday. With Tuesday also being a holiday, profits and losses on Friday will be the last opportunity for entities to realise trading gains on their portfolios in FY26, dealers said. Bonds are settled on a 'T+1' basis and Monday's trades will be settled in the new financial year in April. The 10-year benchmark gilt yield was at 6.58% at the end of FY25.

The result of the state bond auction Friday will also lend cues to gilt prices, with demand seen as modest after supply worth INR 548 billion was absorbed Tuesday. After market hours Wednesday, the RBI said 13 states will raise INR 429.41 billion through bonds Friday, sharply up from INR 120 billion for the week in the indicative calendar. The central bank revised Tuesday's release and the addition of three Andhra Pradesh bonds worth INR 34 billion may further weigh on gilt prices, dealers said.

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 Tuesday.

Focus will be on the government's borrowing calendar for Apr-Sept, likely to be released after market hours Friday. The gross market borrowing for FY27 is likely to be revised lower 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. Informist reported after market hours, quoting a government official, that the government may raise 53-58% of its FY27 gross borrowing target through the issuance of dated securities in Apr-Sept.

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.75-6.92% Friday. On Wednesday, the bond ended at INR 97.27 or 6.8750% yield. This was the highest closing level for the 10-year benchmark yield since Sept. 2, 2024.

OIS RATES

Swap rates are expected to decline on Friday if there is no escalation in the war in West Asia, dealers said. However, rates might rise later in the day if bond yields rise due to the state bond auction Friday. The market will be influenced by Brent crude oil prices, US Treasury yields, and the rupee's movement, along with developments in the West Asia conflict, dealers said.

If offshore funds continue paying fixed rates, the rate could reach 6.55-6.62%, dealers said. If crude oil drops to near $80 per barrel, the five-year swap could ease to 6.20% as a fall triggers stop-losses on paid fixed-rate positions. Some traders think rates will not revert to pre-war levels even if oil prices fall, dealers said. However, if the war in West Asia escalates, some traders expect the five-year swap rate to rise to 7%, dealers said, citing fears of rate hikes in India.

The one-year swap rate is seen at 5.70-6.10% and the five-year at 6.30-6.65% on Friday. On Wednesday, the one-year swap rate ended at 5.92% and the five-year swap rate ended at 6.49%.

CALL

On Friday, the three-day call money rate is likely to open above the RBI's repo rate of 5.25% due to demand for funds in early trade. The call rate is seen in the 4.60-5.25% range throughout the day, as dealers expect inflows from variable-rate repo to ease system liquidity. Wednesday, the two-day call money rate ended at 5.40%.

Dealers said systemic liquidity is expected to return to a comfortable surplus by Monday. A three-day variable rate repo is scheduled for Monday, which is likely to ease the call rate. Government spending is expected to hit the banking system next week in the form of salaries and pensions.

RBI AUCTION

--RBI to conduct INR 750-billion, six-day variable rate repo auction 0930-1000 IST Friday

--13 states to raise INR 429.41 billion via bond sale at 1030-1130 IST Friday

LIQUIDITY

--Total net inflows of INR 365.79 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 26.65 billion as coupon on state bonds Thursday

--INR 60.00 billion as redemption of 182-day Treasury bills Thursday

--INR 72.65 billion as redemption of 364-day T-bills Thursday

--INR 153.44 billion as redemption of 91-day T-bills Friday

--INR 43.05 billion as coupon on state bonds Friday

--INR 10.00 billion as redemption of state bonds Friday

* Outflows

--INR 558.37 billion as redemption of three-day variable rate repo auction Friday

End

US$1 = INR 93.97

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

Reported by Aaryan Khanna

Edited by Ashish Shirke

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