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Informist, Friday, May 22, 2026

 

NEW DELHI – Government bond prices and overnight indexed swap rates will take cues from developments in the West Asia conflict over the weekend, dealers said. With the Reserve Bank of India announcing its surplus transfer to the government Friday, there were no significant cues on the domestic front to look forward to, they said.

 

Money markets are closed on Saturday. Hopes of a peace deal have helped ease crude oil prices and US Treasury yields after the bond and OIS markets closed at 1700 IST Friday. Several reports, quoting sources in both the US and Iran, said the two sides are closer to an agreement than before. An official announcement of a commonly agreed peace deal over the weekend is likely to improve risk appetite as risks of fiscal slippage and high imported inflation ease, dealers said. 

 

However, a derailment of talks may once again lead to a sharp fall in gilt prices and rise in swap rates, dealers said. Traders are also split on whether the RBI's Monetary Policy Committee would hike the repo rate of 5.25% in June. A 25-basis-point rate hike in June is also priced into swap rates, though most bond traders only expect the MPC to begin increasing the repo rate from August.

 

Meanwhile, the call money rate is seen opening above the RBI's policy repo rate of 5.25% Monday due to tight liquidity in the banking system. Liquidity in the banking system is expected to be near neutral or slightly in deficit after Friday's outflows for goods and services payments, dealers said. The one-day call rate is seen at 4.80-5.50% Monday.

 

GOVERNMENT BONDS 

Monday, bond prices are likely to take cues from developments related to the West Asia conflict and movements in Brent crude oil prices over the weekend, dealers said. The yield on the 10-year benchmark 6.48%, 2035 bond is seen in the 7.02-7.14% range Monday. The bond ended at INR 95.86 or 7.0917% yield Friday.

 

A major escalation in the US-Iran war over the weekend could push the benchmark 10-year yield above 7.14%, dealers said. On the other hand, if the two agree on a peace deal over the weekend, the 10-year benchmark yield could fall to 6.90%, dealers said. Traders will focus on offshore factors such as US yields and crude oil prices amid the absence of any domestic trigger, dealers said.  

 

The yield on the 10-year benchmark bond is unlikely to breach the crucial 7.15% level Monday as state-owned banks are expected to buy bonds when the 10-year benchmark bond yield goes up to 7.14%, dealers said. On the lower side, profit booking by traders who bought the 6.48%, 2035 bond when yields were above 7.10% is expected to prevent the benchmark yield from falling below 7.00%, dealers said.

 

OIS RATES

On Monday, swap rates will track movements in US Treasury yields and Brent crude oil prices over the weekend. Some traders expect the US and Iran to inch closer to a peace deal, though traders are aware that both parties are standing firm on their demands. By the end of next week, it will be three months since the Strait of Hormuz closed for transport. 

 

If there is no end to the war in sight, traders may exit their received bets on fears of rising inflation. If the war does not end, the possibility of the MPC raising the policy repo rate in June will rise, they said.

 

As the RBI's transfer of surplus to the Centre was lower than expected, traders will now await measures from the RBI to boost systemic liquidity, with expectations of more dollar-rupee buy-sell swaps. Some traders also expect long-term variable rate repo operations. The central bank will conduct a $5-billion, three-year dollar-rupee buy-sell swap auction Tuesday, which had led to some traders receiving fixed rates earlier this week.  

 

The movement in the rupee and overnight money market rates will also influence swaps. Monday, the one-year swap rate is seen at 6.12-6.40% and the five-year at 6.60-6.90%. On Friday, the one-year swap rate ended at 6.30% and the five-year swap rate ended at 6.82%.

 

CALL

On Monday, the one-day interbank call money rate is likely to open above the RBI's repo rate of 5.25%. Liquidity in the banking system is expected to be near neutral or slightly in deficit after Friday's outflows for GST payments, dealers said. The three-day call rate ended at 5.37% Friday, its highest closing level since Mar. 30.

 

Demand for funds from primary dealerships and the low cash surplus with banks may push the call money rate even to the MSF rate of 5.50?rly in the day, though the central bank's VRR auction would limit the rise later, dealers said. After market hours Friday, the RBI announced it would conduct a four-day VRR auction for INR 1.50 trillion at 0930-1000 IST Monday. The auction will have a subscription of at least INR 500 billion as banks roll over their borrowed cash from previous VRRs and with no scheduled inflows until mid-week, dealers said.

 

Dealers expect the call rate to be around 4.80-5.50% during the day, while the tri-party repo rate is expected to be in the range of 5.00–5.35%. The weighted average call rate is expected to be in the range of 5.20-5.35% Monday, while the weighted average tri-party repo market rate is likely to be in the range of 5.15-5.30%, they said.  

 

RBI AUCTION

--RBI to conduct four-day, INR 1.50 trillion variable rate repo auction 0930-1000 IST.

 

LIQUIDITY

Total net outflow of INR 30.62 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 56.39 billion as coupon on state bonds

--INR 58.02 billion as coupon on 7.54%, 2036 gilt Saturday

--INR 26.20 billion as coupon on 8.15%, 2026 gilt Sunday

--INR 60.27 billion as coupon on 7.09%, 2074 gilt Monday

--INR 88.50 billion as redemption of state bonds

 

* Outflows

--INR 320.00 billion as payment for gilt auction Monday

--INR 160.05 billion as reversal of seven-day repo auction

--INR 164.35 billion as reversal of five-day repo auction

--INR 815.90 billion as reversal of three-day repo auction

 

End

 

US$1 = INR 95.69

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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