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Informist, Tuesday, Apr. 7, 2026

MUMBAI – Government bond prices and overnight indexed swap rates are seen steady before Reserve Bank of India Governor Sanjay Malhotra outlines the rate decision of the Monetary Policy Committee in his address at 1000 IST, dealers said. Traders are divided on what to expect from the policy, both on rates, policy stance, and commentary. The policy repo rate is currently 5.25% and the panel has a 'neutral' stance.

Traders expect the RBI to raise its quarterly inflation forecasts for FY27 by 30-50 bps, and project a higher-than-initially-expected FY27 CPI inflation print due to the surge in crude oil price due to the war in West Asia. Traders expect the RBI forecast of CPI inflation at 4.50-5.00% for FY27. CPI inflation in March, due Monday, is seen at 3.4%, according to an Informist Poll of 13 economists as the war in West Asia likely pushed fuel inflation higher. Most traders also expect the central bank to lower its FY27 GDP growth projections by 20-40 bps.

When the markets open, both may track the movement of Brent crude oil prices and US Treasury yields after US President Donald Trump's deadline for Iran to reopen the Strait of Hormuz ends at 0530 IST. In a social media post Tuesday, Trump said, "A whole civilization will die tonight, never to be brought back again", referring to Iran.

On Wednesday, 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 4.70–5.20% range during the day. Call market dealers do not expect the MPC to change the policy repo rate of 5.25% Wednesday.

GOVERNMENT BONDS

On Wednesday, at open, bond prices may track the movement of Brent crude oil prices after Trump's deadline for Iran to reopen the Strait of Hormuz ends at 0530 IST. However, the focus will be on the RBI's MPC decision. RBI Governor Malhotra will announce the decision at 1000 IST.

Traders largely expect the panel to hold the repo rate steady, continuing its 'neutral' stance and opt for a neutral tone in its commentary. Bond yields have fallen in the past two sessions as traders pared bets of the panel raising the repo rate by 25 basis points Wednesday, though a few dealers still fear a rate hike. Traders fear that oil supply disruptions due to the war in West Asia will stoke inflation, quickening the pace of India's rate hike cycle. Dealers expect the panel to hike rates at its June policy meeting.

As for the policy stance, a few traders expect the MPC to change its stance to "withdrawal of accommodation", thereby setting the stage for a rate hike in June. Most dealers do not expect this since the panel is likely to require more time to assess the full impact of the war in West Asia on the Indian economy, and may refrain from hiking rates so early to avoid a hit to growth. Several dealers also expect the central bank to first set the stage for a rate hike by draining systemic liquidity. The RBI has not conducted a variable-rate reverse repo operation so far this month, despite ample systemic liquidity. Traders hope that the central bank will continue to support systemic liquidity.  

The voting pattern on the rate and stance decision will be closely watched, with some dealers expecting dissents. External MPC member Ram Singh is likely to support a 'neutral' stance after opting for an 'accommodative' stance in the past two policies. Any dissents in voting are likely to pull down bond prices, dealers said. "We know what the direction is, we just need to know what the next action is and how soon it could come, and any dissent could give us that hint," a dealer at a mutual fund said.

The 10-year benchmark yield is expected to be in the range of 6.90% to 7.20%, with 6.90% seen only as a knee-jerk reaction to a policy viewed as "dovish". Traders expect a neutral, cautious tone and phrases such as "wait and watch (mode)" from the panel. Traders do not expect a rate cut, as CPI inflation is projected to rise in FY27 even if the war concludes soon. Some traders fear that the MPC could adopt a tone that is too "dovish," which would be a "policy error" and misalign with macroeconomic fundamentals.

All in all, if the RBI hikes rates, yields are expected to rise. If the policy is neutral, traders may place short bets again as the outcome was priced in, some traders said. If the policy is unexpectedly soft, yields may still rise in the longer run after a brief fall, dealers said.

Traders also await clarity on the RBI's foreign exchange management policy, after it prevented the rupee's depreciation by imposing curbs on net open rupee positions in the onshore market. Some traders had feared a rate hike in April solely to limit the rupee's fall against the dollar. 

The 10-year benchmark 6.48%, 2035 gilt ended at INR 96.13 or 7.0458% yield Tuesday.

OIS RATES

Swap rates may open steady Wednesday before the Monetary Policy Committee's rate decision is announced, dealers said. Overnight developments from the war in West Asia may have an impact early, but traders await RBI Governor Malhotra's commentary on the conflict in his policy statement at 1000 IST.

A status quo on the repo rate at 5.25% is likely to pull down the one-year OIS rate below 6%. If the policy stance remains at "neutral", the contract may fall to around 5.90%. However, the fall may be limited if the six-member committee is divided on the votes and some members vote for a rate hike or a "withdrawal of accommodation" stance, dealers said.

A rate hike will likely send short-term swap rates higher as it will cement the market's fear on sharp monetary policy tightening in India in response to higher crude oil prices due to the West Asia war, dealers said. Traders do not expect a rate cut as CPI inflation is seen on the rise in FY27 even if the war concludes shortly.

Meanwhile, comments from Malhotra, other RBI officials and the MPC on the trajectory of growth and inflation will be keenly be watched for cues on the direction of rates. Traders are divided on what to expect, with scenarios being built on a "neutral", "hawkish", or "dovish" tones.

Currently, swap rates are pricing in a "hawkish" tone, focusing on keeping inflation in check, without a rate hike, dealers said. A growth-supportive policy tone may send swap rates tumbling even further and trigger stop-losses on paid fixed rate bets in both the one- and five-year swap rates. The one-year swap rate could fall to as low as 5.70% and the five-year swap rate to 6.30%.

The movement in crude oil prices and US Treasury yields may also lend cues at the open. After Indian markets closed, US President Donald Trump said on social media that "A whole civilization will die tonight, never to be brought back again", referring to Iran. He has set a deadline of 0530 IST Wednesday for Iran to agree to open the Strait of Hormuz before bombing its bridges and power facilities, a war crime under international law.

The one-year swap rate is seen at 5.70-6.40% and the five-year at 6.30-7.00% Wednesday. On Tuesday, the one-day swap rate ended at 6.15% and the five-year rate ended at 6.66%.

CALL

On Wednesday, 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 call money rate is seen in the 4.70–5.20% range during the day. The call rate ended at 4.70% Tuesday.

Outflows for export duty and tax deducted at source payments scheduled this week are expected to drain liquidity from the banking system, as will the INR 182-billion payment for the state bond auction due Wednesday. However, the call and tri-party repo rates are unlikely to rise above the repo rate, given the comfortable liquidity in the system, dealers said. 

RBI AUCTIONS

--RBI to auction 91-day T-bills worth INR 120 billion 1230-1330 IST

--RBI to auction 182-day T-bills worth INR 60 billion 1230-1330 IST

--RBI to auction 364-day T-bills worth INR 60 billion 1230-1330 IST

LIQUIDITY

--Total net inflows of INR 271.47 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 17.12 billion as coupon on state bonds

--INR 10.80 billion as redemption of state bonds

--INR 348.57 billion as redemption of 7.27%, 2026 gilt

--INR 12.67 billion as coupon on 7.27%, 2026 gilt

--INR 63.90 billion as coupon on 7.10%, 2034 gilt

* Outflows

--INR 181.59 billion as payment for state bond auction

End

US$1 = INR 93.01

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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