More Stories

Informist, Thursday, May 21, 2026

MUMBAI – Government bond prices and overnight indexed swap rates are likely to track developments related to the West Asia conflict, as well as movements in Brent crude oil prices and US Treasury yields, at open on Friday. The lack of a peace deal and a fragile ceasefire will continue to keep the market on edge, dealers said.

For India, dealers said the ongoing blockade of the Strait of Hormuz and Brent futures staying above $100 a barrel strengthened the case for an interest rate hike by the Monetary Policy Committee of the Reserve Bank of India, as the spillover would start showing up in retail inflation. With petrol and diesel prices raised twice since Friday and further hikes expected, CPI inflation could move toward the upper end of the RBI's 2-6% tolerance band later in FY27.

A Reuters report, quoting sources, said Iran's Supreme Leader has instructed that the country's near-weapons-grade uranium must remain within the country, signalling a tougher stance on a key US demand in the ongoing negotiations. The move is likely to further complicate efforts to secure a ceasefire in West Asia. Following the report, Brent crude futures for July delivery climbed to an intraday high of nearly $108 per barrel and were at $106.81 a barrel at 1700 IST.

Post-market hours Thursday, the RBI announced it would conduct a three-day variable-rate repo auction for INR 1.00 trillion at 0930-1000 IST Friday. The auction is likely to be well subscribed if the tri-party repo rate is on the higher side. This will help cap money market rates near the RBI's repo rate, they said.

Focus will also be on the outcome of the RBI's board meeting to decide on the surplus to be transferred to the government for 2025-26 (Apr-Mar). Traders expect the RBI to transfer a surplus of INR 2.70 trillion to INR 3.50 trillion to the government.

Traders will also track the results of the INR 320-billion weekly gilt auction Friday. The government will sell INR 110 billion each of the 6.03%, 2029 bond and the 6.68%, 2033 bond, and INR 100 billion of the 7.24%, 2055 bond. Demand at the auction is expected from banks and insurers, dealers said. However, the focus on a rate hike in June is likely to dampen overall demand, especially if there is no positive development on the war in West Asia, they added.

GOVERNMENT BONDS

Bond prices will track developments related to the West Asia conflict and movements in Brent crude oil prices at the open on Friday, dealers said.

The yield on the 6.48%, 2035 bond is seen in the 7.05-7.15% range Friday. However, any signs of escalation in the West Asia conflict could push the benchmark 10-year yield above 7.15%. Traders said purchases of the bond by state-owned banks at yields of 7.14-7.15% are likely to prevent the benchmark yield from breaching that mark. At the lower end of the range, profit booking by traders who bought gilts when yields were above 7.10% is expected to prevent the yield from falling below 7.05%, dealers said.

The benchmark 10-year 6.48%, 2035 bond ended at INR 95.71, sharply lower than INR 95.96 Wednesday. Its yield settled at 7.1134%, up from 7.0761% Wednesday.

OIS RATES

Swap rates are expected to open steady on Friday if there is no major development in the West Asia conflict. Traders have already priced in a 25-50 bps repo rate hike in June and around 125 bps of total rate increases in the next 12 months, dealers said.

They said the RBI's plan to inject rupee liquidity through a three-year, $5 billion dollar-rupee buy-sell swap auction should help cap short-term OIS rates. The overnight Mumbai Interbank Outright Rate, which serves as the floating leg for OIS contracts, is likely to hold in the 5.15-5.30% range until the MPC's next rate decision on Jun. 5, unless the rate-setting panel hikes the repo rate in an off-cycle meeting.

Traders also await the transfer of the RBI's surplus for FY26 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%. Without a higher-than-budgeted transfer of surplus from the RBI, the government faces 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.

The movement in the rupee and overnight money market rates will also affect swaps. Thursday, the one-year swap rate is seen at 6.12-6.40% and the five-year at 6.60-6.90%.

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 a low liquidity surplus in the banking system and early demand for funds from primary dealerships and outflows related to the goods and services tax. Dealers expect the liquidity surplus for Thursday to fall below INR 1 trillion after payment for the GST, the lowest since late March.  

Dealers expect the call rate to be around 4.80-5.35% during the day, while the tri-party repo rate is expected to be in the range of 5.00–5.25%. The weighted average call rate is expected to be in the range of 5.25-5.35% for Friday, while the weighted average tri-party repo market rate is likely to be in the range of 5.10-5.25%, they said.  

The one-day call money rate ended at 5.27% Thursday, down from 5.35% at the open and sharply up from 4.75% at the close Wednesday. The weighted average rate was 5.27%, higher than 5.23% Wednesday. 

RBI AUCTION

--RBI to hold 3-day VRR auction for INR 1.00 tln 0930-1000 IST Fri 

LIQUIDITY

Total net inflow of INR 11.10 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 11.10 billion as coupon on state bonds

* Outflows

--INR 253.600 billion as payment for redemption of 1-day repo

End

US$1 = INR 96.20

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

Reported by Meera Nair

Edited by Saji George Titus

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2026. All rights reserved.