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Informist, Tuesday, May 19, 2026

NEW DELHI – Government bond prices are expected to fall and overnight indexed swap rates are expected to rise on Wednesday as US Treasury yields surged after Indian markets shut. Fears of high inflation in the world's largest economy, driven by the ongoing war in West Asia, led the 10-year US yield to hit a 16-month high of 4.69%, up from 4.62% at 1700 IST Tuesday. 

Though most traders do not expect the US to attack Iran despite threats from President Donald Trump, the lack of a peace deal and a fragile ceasefire will continue to keep the market on edge, dealers said. The movement in crude oil prices in response to developments in the war in West Asia is being closely watched. Brent crude for July delivery continued to hover around $110 per barrel. 

On the domestic front, traders await the transfer of the RBI's surplus for 2025-26 (Apr-Mar) to the Centre, likely to be announced Friday. Traders expect a transfer of INR 2.7 trillion to INR 3.5 trillion, with some expecting a cut in the RBI's contingency risk buffer to 6.5% from 7.5%. 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. A disappointing transfer is likely to cause a sharp fall in gilt prices, prompting traders to hedge their portfolios by paying swap rates, dealers said.

Meanwhile, 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. The one-day call money rate is seen in the 4.80–5.35% range Wednesday.

GOVERNMENT BONDS

On Wednesday, the market's focus is likely to remain on overseas triggers, dealers said. Any escalation in the war in West Asia could push bond yields higher from current levels. Traders will also monitor overnight indexed swap rates and the rupee, they said.

The yield on the 6.48%, 2035 bond is seen in the 7.05-7.15% range Wednesday. The bond ended at INR 95.73, or 7.1101%, on Tuesday. Traders do not expect the 10-year benchmark yield to rise above 7.15% on a sustained basis, as state-owned banks consider those levels attractive for aggressively purchasing the bond, dealers said. Some sections of the market also expect the RBI to buy gilts in the secondary market to cap yields.

OIS RATES

On Wednesday, swap rates are expected to open higher due to a rise in US Treasury yields. Offshore traders are likely to pay fixed rates heavily if global cues remain adverse, which may trigger stop-losses on traders' received fixed-rate bets in early trade, dealers said.

For India, the continued blockade of the Strait of Hormuz and Brent futures above $110 a barrel made the case for the MPC to hike repo rates as spillovers would begin to get reflected in retail inflation, dealers said. With two price hikes in petrol and diesel since Friday and more expected, CPI inflation could climb towards the top end of the RBI's 2-6% tolerance band later in FY27, they said. Swap rates are currently pricing in nearly 125 bps of repo rate increases over the next 12 months. 

Traders will also track overnight money market rates with goods and services tax payments of around INR 2 trillion scheduled this week. The RBI will conduct a five-day, INR 1.50 trillion variable rate repo auction Wednesday. This will help keep the overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – within the 5.20-5.30% band until Monday, dealers said.

The movement in US Treasury yields, the rupee, and overnight money market rates will also affect swaps. Wednesday, the one-year swap rate is seen at 6.15-6.45% and the five-year at 6.60-7.00%. On Tuesday, the one-year OIS rate ended at 6.27% and the five-year rate at 6.85%.

CALL

Wednesday, 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. Liquidity conditions have tightened from a comfortable surplus in April and GST payments will likely drain around INR 800 billion of liquidity Wednesday, dealers said.

The RBI's five-day, INR 1.50 trillion VRR auction may be subscribed to more than 60% as banks are likely to borrow from the RBI to fund the outflows. The large liquidity injection from the central bank was widely expected and may help keep the call money rate near the repo rate, dealers said. On Tuesday, the one-day call rate ended at 4.70%.

The one-day call money rate is seen in the 4.80–5.35% range Wednesday. 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 5.20-5.35% and in the tri-party repo market, it is likely to be in the 5.00-5.20% band, they said.

RBI AUCTION

* RBI to auction 91-day T-bills worth INR 120 billion 1030-1130 IST

* RBI to auction 182-day T-bills worth INR 60 billion 1030-1130 IST

* RBI to auction 364-day T-bills worth INR 60 billion 1030-1130 IST

LIQUIDITY

Total net outflows of INR 182.08 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 8.92 billion as coupon on state bonds

--INR 10.00 billion as redemption of state bonds

* Outflows

--INR 201.00 billion as payment for state bond auction

End

US$1 = INR 96.53

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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