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Informist, Monday, Apr. 6, 2026

MUMBAI – Government bond prices may rise Tuesday if the West Asia war shows further signs of de-escalation, and the 10-year benchmark bond yield is on track to fall to 6.95% if crude oil prices ease and the outcome of the Monetary Policy Committee meeting is favourable for bonds, dealers said. The Reserve Bank of India's rate-setting panel will announce its decision on the repo rate of 5.25% and policy stance Wednesday.

Most traders expect the repo rate to remain unchanged on Wednesday, with "hawkish" commentary focusing on curbing inflation that may set the stage for rate hikes. The RBI is likely to peg its inflation forecast for FY27 around 4.60%, dealers said. Several traders expect the rate-setting panel to hike repo rate by 25 bps in June. Overnight indexed swap rates will also track the same domestic and global cues, along with the movement in US Treasury yields and the rupee.

The one-day call money rate is expected to open below the RBI's repo rate of 5.25% on Tuesday due to a large liquidity surplus in the banking system. The one-day call money rate is seen in a range of 4.50-5.20%.

GOVERNMENT BONDS

On Tuesday, government bond prices may rise if the West Asia war shows further signs of de-escalation, and the 10-year benchmark bond yield is on track to fall to 6.95% if crude oil prices ease and the outcome of the Monetary Policy Committee meeting is favourable for bonds, dealers said. Traders may avoid large bets after the recent volatility.

The 10-year gilt's yield fell almost 9 basis points Monday, the biggest single-day fall in over three months. The benchmark yield had risen nearly 50 bps in the past 12 trading sessions.

Traders will also track the result of the state bond auction Tuesday. Seven states will raise INR 181.59 billion through bonds at 1030-1130 IST. Some traders may place short bets on the 10-year benchmark bond ahead of its fresh supply Friday, with the government selling INR 340 billion of the 6.48%, 2035 gilt, dealers said.

Due to the rate cues coming from the West Asia conflict, and after the Centre published its borrowing calendar for Apr-Sept, traders expect the bond yield curve to "bear-flatten", dealers added. Foreign portfolio investors may continue selling fully accessible route bonds, weighing on prices.

The 10-year benchmark 6.48%, 2035 bond is seen in the range of 6.95-7.20% Tuesday. On Monday, it ended at INR 96.13 or 7.0458% yield.

OIS RATES

On Tuesday, swaps may open steady on caution before the Monetary Policy Committee's decision is announced Wednesday. Developments in the military conflict between US-Israel and Iran will have a significant impact on the rate view in India and the US, which may lead to a sharp move in swap rates as well.

Traders widely expect the Monetary Policy Committee to keep status quo on the policy repo rate at 5.25%, especially with the rupee having recovered from the record low hit last week against the dollar. News of a potential timeline to reopen the Strait of Hormuz, a vital oil supply route, may lead to traders reversing their paid fixed income bets, pulling swap rates down sharply again after the recent volatility, dealers said. 

The five-year OIS rate is on track to test 7.00%, its highest level since October 2022, if crude oil prices continue climbing, dealers said. A cooling of hostilities in West Asia may result in the five-year swap falling to as low as 6.30% as a fall triggers stop-losses on paid fixed-rate positions. Some traders expect rates to remain above pre-war levels even if oil prices fall, dealers said.

The one-year swap rate is seen at 5.90-6.40% and the five-year at 6.45-7.00% Tuesday. On Monday, the one-year swap rate ended at 6.18% and the five-year rate ended at 6.70%.

CALL

Tuesday, the one-day call money rate is likely to open below the RBI's repo rate of 5.25% due to sufficient liquidity in the banking system. The one-day call money rate is seen in the 4.50–5.20% range during the day, as dealers expect ample liquidity and lower demand will bring rates down later in the day. The one-day call rate ended at 4.75% Monday.

Outflows for excise duty and tax deducted at source payments will drain between INR 500 billion and INR 700 billion from banking system liquidity Tuesday. However, the call and tri-party repo rates are unlikely to rise above the repo rate due to the comfortable liquidity in the banking system, dealers said.

RBI AUCTIONS

--Seven states to raise INR 181.59 billion via bond sale 1030-1130 IST

LIQUIDITY

--Total net inflows of INR 106.37 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 6.86 billion as coupon on state bonds

--INR 37.04 billion as coupon on 6.45%, 2029 gilt

--INR 62.47 billion as coupon on 6.79%, 2034 gilt

* Outflows

--Nil

End

US$1 = INR 93.06

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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