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Informist, Thursday, May 14, 2026

MUMBAI – Government bond prices and overnight indexed swap rates are likely to track developments related to US-Iran peace negotiations and Brent crude oil prices, dealers said. 

Traders will closely track the result of the weekly gilt auction Friday, when the government will sell INR 210 billion of the 6.36%, 2031 bond and INR 110 billion of a new 40-year 2066 bond. State-owned banks with a higher risk appetite are likely to pick up the five-year bond at the auction, dealers said. The 6.36%, 2031 bond ended at INR 98.20, up from INR 98.10, while its yield ended at 6.8063%, against 6.8313% Thursday. For the new 2066 bond, insurers and pension funds are likely to bid aggressively, dealers said. Traders expect the coupon on the new 40-year bond to be in the range of 7.67-7.72%. 

Traders also expect the government to raise petrol, diesel and cooking gas prices to support oil marketing companies, which are losing money on retail sales after crude oil prices shot up because of the war. Traders expect a price hike of INR 5 to INR 30 per litre. If pump prices rise, CPI inflation could climb towards the top end of the RBI's 2-6% tolerance band later in the 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. 

India's wholesale inflation rose to a 42-month high of 8.30% year-on-year in April, driven by a sharp increase in fuel and power inflation amid the energy crisis triggered by the West Asia conflict. The headline print was significantly above the 5.5% estimate in an Informist poll. Traders expect wholesale inflation to rise further as crude oil prices have remained above $100 per barrel. Wholesale fuel and power inflation surged to a 42-month high of 24.71% in April, reflecting the severe impact of the West Asia energy crisis. Economists had estimated fuel and power inflation at around 4-6% for April, compared with 1.05% in March. 

GOVERNMENT BONDS

On Friday, traders will track developments related to the West Asia war and Brent crude oil prices, dealers said. The absence of a peace deal between the US and Iran kept Brent crude oil prices above $100 per barrel Thursday. Any overnight escalation in the West Asia war could push bond yields higher, 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 the 6.98-7.10% range Friday. 

On Monday, traders will track the result of a switch auction, wherein the government announced it would switch eight gilts worth INR 300 billion with five longer-term gilts. Some traders expect the auction on Monday to be partially switched as the securities announced are similar to those at earlier auctions, and banks do not hold many of these source securities since they have been switched already. Had the government included the 6.33%, 2035 gilt and other previous benchmark securities as destination securities at the auction, these would have found demand from traders, dealers said.

The benchmark 10-year 6.48%, 2035 bond ended at INR 96.32, sharply higher than INR 96.13 Wednesday. Its yield ended at 7.0203%, against 7.0493% in the previous session. The benchmark yield closed above the psychologically crucial 7% mark for the fourth consecutive session Thursday. The yield hit 7.0614% earlier in the session, the highest since Apr. 30.

OIS RATES

As has been the case since the war in West Asia began, swap rates on Friday will track crude oil prices and developments in the US-Iran peace negotiations, dealers said.

Traders have opposing views on liquidity, with some expecting it to improve in the next month or so following the RBI's transfer of surplus to the Centre, which is expected by the end of May. Traders expect a surplus transfer of INR 2.7 trillion to INR 3.5 trillion. Some traders expect liquidity to shrink going ahead, as has been the trend since the new financial year began in April, dealers 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 5.95-6.15% and the five-year swap at 6.50-6.82%.

The five-year swap rate ended at 6.61%, down from 6.66% Wednesday. The five-year swap rate traded in a thin band near the end of trade as traders likely paid one-year OIS to receive the five-year swap rate. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 924.45 billion at 1700 IST, slightly lower than INR 1.05 trillion Wednesday. 

CALL

On Friday, the three-day interbank call money rate is likely to open above the RBI's repo rate of 5.25% due to early demand for funds from primary dealerships ahead of the weekly gilt auction, and some banks maintaining their cash reserve ratio requirements for the reporting fortnight ending Friday, dealers said. Some banks will borrow more to fulfil their three-day requirements, they said. 

The three-day call money rate is seen in the range of 4.80-5.30% Friday, whereas the tri-party repo rate is expected to be in the range of 4.90–5.15%, dealers said. The weighted average call rate will be in the range of 5.20-5.30% and in the tri-party repo market, it is likely to be in the 5.00-5.20% band, dealers said. On Thursday, the one-day call money rate ended at 4.50%, sharply lower than 5.20% Wednesday.

RBI AUCTION

--Government to auction INR 320 bln of two gilts Friday 

LIQUIDITY

Total net inflows of INR 67.49 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 15.18 billion as coupon on state-bonds

--INR 14.68 billion as coupon on on 5.74%, 2026

--INR 37.63 billion as coupon on 6.79%, 2027

* Outflows

--Nil

End

US$1 = INR 95.76

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

Reported by Meera Nair and Kabir Sharma

Edited by Avishek Dutta

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