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Informist, Wednesday, May 20, 2026

 

NEW DELHI – Government bond prices are seen opening higher Thursday and overnight indexed swap rates are seen lower on multiple reports that the US and Iran are close to a deal to end the war in West Asia. Saudi Arabian news outlet Al Hadath said officials from Pakistan, a key mediator, may travel to Iran Thursday to unveil the draft of the peace deal agreed between the warring parties. US President Donald Trump said the peace talks with Iran were in their final stages. Iran's Tasnim news agency quoted a foreign ministry spokesperson saying they were engaged in negotiations with the US through Pakistani mediators.

 

Brent Crude futures for July delivery fell to as low as $103.24 per barrel from $108.75 a barrel at 1700 IST Wednesday, the end of Indian market hours. The 10-year US Treasury note retreated from an over-one-year high above 4.65% and fell to 4.57%. The long-awaited breakthrough may lead to a sharp move in the Indian market as reopening of the Strait of Hormuz is expected to reduce inflationary pressures in the Indian economy and weaken the case for rate hikes by the Reserve Bank of India's Monetary Policy Committee, dealers said.

 

On the domestic front, traders await the transfer of the RBI's surplus for the financial year 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.

 

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 range of 4.80–5.35% Thursday.

 

GOVERNMENT BONDS

Thursday, the primary trigger will be the developments in West Asia and their impact on crude oil prices and US Treasury yields, dealers said. Gilt prices are also seen rising, tracking a likely rise in the rupee against the dollar after the RBI, after market hours, said it will conduct a $5 billion, three-year dollar-rupee buy-sell swap auction Tuesday. Traders have been awaiting measures from the central bank to support the rupee and infuse durable liquidity into the banking system.

 

The yield on the 10-year benchmark 6.48%, 2035 bond is seen in the 6.98-7.15% range Thursday. The bond ended at INR 95.96 or 7.08% yield Wednesday.

 

Traders said purchases from state-owned banks at the 7.14-7.15% yield level, which they see as attractive, are likely to prevent the benchmark yield from breaching that level. At the lower end of the bond yield's trading range, profit-taking by traders who bought gilts when yields were above 7.10% is expected to prevent the yield from falling below 7.00%, dealers said.

 

OIS RATES

Swap rates may fall sharply Thursday on positive developments in the West Asia crisis, dealers said. The RBI's announcement of injecting rupee liquidity by conducting a three-year, $5 billion dollar-rupee buy-sell swap auction may keep short-term OIS rates in check, dealers said. The overnight Mumbai Interbank Outright Rate--the floating leg of the OIS contract--is expected to remain within the 5.15-5.30?nd until the Monetary Policy Committee's next rate decision on Jun. 5.

 

For India, the continued blockade of the Strait of Hormuz and Brent futures being above $100 a barrel made the case for the committee to raise the repo rate as spillovers would begin to get reflected in retail inflation, dealers said. Should the key waterway in West Asia be reopened, traders will aggressively unwind their paid fixed rate positions as swap rates are currently pricing in nearly 125 basis points of repo rate increases in the next year.

 

The movement in the rupee may also affect swaps. Thursday, the one-year swap rate is seen at 6.12-6.40% and the five-year at 6.60-7.00%. Wednesday, the one-year swap rate ended at 6.21% and the five-year rate ended at 6.80%. 

 

CALL

Thursday, the one-day interbank call money rate is likely to open above the RBI's repo rate of 5.25% owing to early demand for funds from primary dealerships, with banks also likely to borrow to pay goods and services tax to the government. Some banks expect the liquidity surplus for Wednesday to fall below INR 1 trillion, the lowest since late March, with the settlement of an INR 201-billion state bond auction also draining liquidity.

 

After market hours Wednesday, the RBI announced it would conduct an overnight variable rate repo auction for INR 1.25 trillion at 0930-1000 IST Thursday. The auction is likely to be well subscribed, as liquidity in the banking system is expected to be the lowest in seven weeks, dealers said. This will help cap money market rates near the policy repo rate, they said. The one-day call rate ended at 4.75% Wednesday.

 

The one-day call money rate is seen in the 4.90–5.35% range Thursday. The tri-party repo rate is expected to be in the range of 4.90–5.20%, 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 5.10-5.20?nd, they said.

 

RBI AUCTION

--Nil

 

LIQUIDITY

Total net outflows of INR 15.20 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 6.99 billion as coupon on state bonds

--INR 160.05 billion as redemption of 91-day Treasury bills

--INR 70.00 billion as redemption of 182-day T-bills

--INR 50.88 billion as redemption of 364-day T-bills

 

* Outflows

--INR 171.12 billion as payment for 91-day T-bills

--INR 72.00 billion as payment for 182-day T-bills

--INR 60.00 billion as payment for 364-day T-bills

 

End

 

US$1 = INR 96.82

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

 

Reported by Aaryan Khanna

Edited by Rajeev Pai

 

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