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Informist, Monday, May 18, 2026

 

NEW DELHI – Government bond prices and overnight indexed swap rates Tuesday are likely to take cues from the developments in the West Asia war and their impact on crude oil prices. The dearth of significant domestic cues will keep the focus on global triggers, including US Treasury yields, though movements in the rupee may also provide direction, dealers said.

 

The RBI's and the government's actions to limit the impact of the conflict on India's growth and inflation will also prompt dealers to bet on domestic interest rates. CPI inflation is expected to average near 5.0% in 2026-27 (Apr-Mar) after oil marketing companies hiked petrol and diesel prices by INR 3 per litre on Friday, following the sharp rise in crude oil prices due to the war. This is well above the RBI's target of 4% and will bring inflation close to the policy repo rate of 5.25%, prompting traders to bet on repo rate hikes in FY27.

 

Traders also await the transfer of the RBI's FY26 surplus to the Centre. Informist reported Monday that the RBI's central board will meet Thursday to approve the transfer of the surplus. Traders expect a transfer of INR 2.7 trillion to INR 3.5 trillion, with some expecting a cut in the contingency risk buffer to 6.5%. Without a higher-than-budgeted transfer of surplus from the RBI, the government is looking at a gaping hole of nearly INR 5 trillion in its finances, an analysis by Informist showed.

 

Meanwhile, the one-day call money rate is likely to open above the Reserve Bank of India's policy repo rate of 5.25% due to early demand for funds amid shrinking surplus liquidity and outflows for goods and services tax, dealers said. The one-day call rate is seen at 4.80-5.30%.

 

GOVERNMENT BONDS

On Tuesday, traders will track developments in the war in West Asia and Brent crude oil prices, dealers said. US President Donald Trump's latest warning to Iran has dampened traders' risk appetite and fuelled fears of a further escalation in the conflict. Any major escalation in the war could push bond yields higher, dealers said. Traders will also track the movement of overnight indexed swap rates and the rupee, they said.

 

Traders will also closely track the auction of state government securities, wherein six states will raise INR 201 billion through bond sales Tuesday. Traders expect the auction to sail through smoothly, as the auction size is smaller than the INR 231 billion indicated in the states' borrowing calendar for Apr-Jun, dealers said. Demand from banks for their held-to-maturity portfolios and insurers is expected at the auction, dealers said. However, higher-than-expected cut-off yields on bonds at the auction could weigh on gilt prices in the secondary market, they said.

 

The yield on the 6.48%, 2035 bond is seen in the 7.00-7.15% range Tuesday. On Monday, the bond ended at INR 95.59, or 7.1313% yield, the highest closing level for the 10-year benchmark yield since Apr. 2.

 

OIS RATES

Tuesday, swaps are seen giving up some of the rise seen Monday as global yields eased after Indian market hours on a report that the US had accepted a waiver on Iranian oil sanctions during negotiations. Traders also do not expect the US to attack Iran, despite threats from President Donald Trump, they said.

 

Traders will also track the RBI's action on liquidity, with outflows of around INR 2 trillion for goods and services tax payments expected to drain the surplus this week. The overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract - is seen being set near the repo rate.

 

After state-owned oil marketing companies raised retail prices of petrol and diesel by INR 3 per litre Friday, traders expect more such hikes. Due to a rise in pump prices, CPI inflation could climb towards the top end of the RBI's 2-6% tolerance band later in FY27, dealers said. The movement in US Treasury yields, the rupee, and overnight money market rates will also affect swaps.

 

Tuesday, the one-year swap rate is seen at 6.20-6.50% and the five-year at 6.60-7.00%. On Monday, the one-year contract ended at 6.31% and the five-year swap rate ended at 6.85%.

 

CALL

Tuesday, the one-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 and some banks. Goods and services payments may begin Tuesday, dealers said. The one-day call rate ended at 5.18% Monday. 

 

The one-day call money rate is seen in the 4.80–5.30% range Tuesday. 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?nd, dealers said.

 

RBI AUCTION

--Six states to raise INR 201 billion via bond sale 1030-1130 IST

 

LIQUIDITY

Total net inflows of INR 15.59 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 10.76 billion as coupon on state bonds

--INR 4.83 billion as coupon on o 7.43%, 2076 gilt

 

* Outflows

--Nil

 

End

 

US$1 = INR 96.35

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

 

Reported by Aaryan Khanna

Edited by Saji George Titus

 

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