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Informist, Thursday, May 7, 2026

MUMBAI – Government bond prices are likely to open steady before the weekly gilt auction at 1030-1130 IST unless there are further developments in the military conflict in West Asia, dealers said. Bond and overnight indexed swap rates are hopeful of a peace deal between the US and Iran after recent news reports and await official statements from both countries and mediator Pakistan overnight, they said. 

Gilt and overnight indexed swap traders will also track the results of the auction through the day, dealers said. The government will sell a new 10-year 2036 bond, the coupon on which is seen at around 6.90%, they added. Any major escalation in the West Asia war and rise in Brent crude oil futures above $105 a barrel may push the yield on the 10-year benchmark 6.48%, 2035 gilt close to near 7.00%, dealers said.

Traders expect the Centre will hike petrol and diesel prices to support oil marketing companies, which are losing money on retail sales after crude oil prices jumped because of the war in West Asia. Reserve bank of India's Monetary Policy Committee external member Ram Singh Tuesday said the government should hike retail fuel prices. If pump prices go up, CPI inflation could climb towards the top of the RBI's 2-6% tolerance band later in financial year 2026-27 (Apr-Mar), dealers said.

Swap rates have already factored in multiple repo rate hikes in India in FY27 and beyond and are largely pricing in a hike in retail energy prices. Dealers are just unsure of when such a price hike would happen and some expect it this month.

On Friday, the three-day call money rate is likely to open near the RBI's repo rate of 5.25% due to an early demand from funds from banks and primary dealers, dealers said. Demand from primary dealers may be higher than usual to meet underwriting commitments for the gilt auction, they said. 

GOVERNMENT BONDS

Friday, bond prices will closely track the results of the weekly gilt auction, dealers said. Traders who had earlier short sold the 10-year benchmark gilt will likely cover their short positions ahead of the auction, they said. This will help bond prices, dealers added. 

Bond prices will also track developments in the West Asia war and Brent crude oil prices, dealers said. Any major sign of an end to the war could pull Brent crude oil prices to near $90 a barrel, which may prompt the 10-year benchmark gilt yield to fall to 6.85%. A further fall in the bond yield is not expected as CPI inflation is expected to remain above 4% through the year, which will prompt traders to take profits at that yield level, dealers said. However, any major escalation in the West Asia war could push the 10-year bond yield back above 7.00%, dealers said.

Traders will also track the movement of overnight indexed swap rates and the rupee, they said. The yield on the 6.48%, 2035 bond is seen in a range of 6.90-7.00% Friday. The 10-year benchmark yield ended at 6.9328%, up from 6.9219% Wednesday.

OIS

As has been the case since the conflict in West Asia began, swaps will track crude oil prices and developments on US-Iran peace talks Friday. Swaps will also track the movement in bond yields after the result of the INR-340-billion gilt auction. The government will sell a new 10-year 2036 bond, the coupon on which is seen at around 6.90%, dealers said. 

Traders have opposing views on liquidity, with some expecting liquidity to improve in the next month or so after the Reserve Bank of India announces its transfer of surplus to the Centre--which is expected by end of May, dealers said. Most traders expect liquidity to shrink going ahead, as has been the trend since the new financial year began April, they said. Some traders paid fixed rates Thursday on bets that the liquidity surplus would decrease by end of May and thereby push up the Overnight Mumbai Interbank Outright Rate. 

"Now CIC (currency in circulation) is coming off, and we're seeing FX intervention so I don't think call (money rate) will be at 4.90% like we saw in April," a dealer at a mutual fund said. 

The movement in US Treasury yields, the rupee, and overnight money market rates will also affect swaps. On Friday, the one-year swap rate is seen at 5.75-6.15% and the five-year swap at 6.35-6.73%. Some offshore traders paid fixed rates in swaps and this pushed rates higher. The one-year swap rate eased to 5.87% Thursday from 5.90% Wednesday. The five-year swap rate ended at 6.51%, marginally up from 6.50% Wednesday. Both the contracts ended off the day's high of 5.94% and 6.56% respectively.

CALL

Friday, the three-day interbank call money rate is likely to open at 5.25–5.30% due to increased demand for funds from primary dealerships ahead of the weekly gilt auction, dealers said. The government will sell INR 340 billion of a new 10-year, 2036 gilt at auction 1030-1130 IST. The one-day call money rate is seen in the range of 4.90–5.35% during the day, while the tri-party repo rate is expected in the band of 4.95–5.15%. On Thursday, the one-day call rate ended at 5.10%.

Liquidity in the banking system is likely to remain comfortable, keeping money market rates at or below the repo rate of 5.25%, dealers said. The weighted average call rate is likely to be in the range of 5.10–5.25%, while that in the tri-party repo market is seen at 5.05–5.15%, dealers said. Banks are expected to remain on the borrowing side in the tri-party repo market to maintain their cash reserve ratio requirements, while primary dealerships may continue to rely on the call market for funds, they said. 
 

RBI AUCTION

--Auction for primary dealers to underwrite INR 340 billion of new 2036 bond 0900-0930 IST

--Government to sell INR 340 billion of a new 10-year, 2036 gilt 1030-1130 IST

LIQUIDITY

Total net inflows of INR 89.84 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 19.84 billion as coupon on state bonds

--INR 70.00 billion for 182-day T-bills

* Outflows

--Nil

End

US$1 = INR 94.25

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

Reported by Meera Nair and Aaryan Khanna

Edited by Deepshikha Bhardwaj

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