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Informist, Monday, May 25, 2026

MUMBAI – Government bond prices and overnight indexed swap rates will take cues from developments related to the US-Iran war and its impact on crude oil prices, dealers said. Traders expect the warring parties to sign a peace deal as early as this week after comments from senior officials over the weekend showed that most outstanding issues had been negotiated, they said.

On the other hand, a setback in peace negotiations and a rise in crude oil prices could move the 10-year gilt yield close to 7.10%. The one- and five-year OIS rate may test the recent high of 6.44% and 6.90%, respectively, but are not expected to rise further from there, dealers said. 

Gilt prices will also closely track the result of the auction of state government securities Tuesday, wherein states will raise INR 134.50 billion through sales of bonds, dealers said. The auction size is lower than the INR 239.50 billion indicated in the borrowing calendar for the June quarter and demand may exceed supply, causing aggressive bidding, dealers said. Demand for state bonds is expected from banks, insurers, and pension funds. The cut-off yields are likely to be 5-6 basis points lower than at previous auction, they said.

The one-day call money rate may open above the Reserve Bank of India's policy repo rate of 5.25% due to early demand for funds from primary dealers amid tight liquidity. The one-day call money rate is seen at 4.80-5.50% Tuesday. 

GOVERNMENT BONDS 

Bond prices are likely to take cues from developments related to the US-Iran war and movement in Brent crude oil prices Tuesday, dealers said. The yield on the 10-year benchmark 6.48%, 2035 bond is seen in the 6.90-7.10% range. If a peace deal is signed between the two countries, the benchmark yield could fall towards the 6.90% level, dealers said.

On the other hand, a setback in peace negotiations and a rise in crude oil prices could move the 10-year gilt yield close to 7.10%. On Monday, the 10-year benchmark 6.48%, 2035 bond ended at INR 96.28, or 7.0270% yield. 

If there are no fresh developments on the West Asia front, state-owned banks are expected to step up purchases if yields rise, dealers said. On the lower side, profit taking by traders who bought the 6.48%, 2035 bond when the yield was above 7.10% is expected to prevent the benchmark yield from falling below 7.00%, they added.

OIS RATES

On Tuesday, swap rates will track developments in the West Asia war and its impact on crude oil prices, dealers said. With recent reports suggesting fruitful negotiations between the US and Iran, traders expect the warring parties to sign a peace deal as early as this week. This is likely to drag down the one-year swap rate to 5.90% and the five-year OIS rate to 6.40%, dealers said.

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. The Strait of Hormuz has been shut for nearly three months since the US and Israel bombed Tehran and killed Iran's supreme leader. In peace time, around 20% of the world's oil and half of India's crude oil demand transitted the vital waterway.

While most trades on OIS rates will be influenced by global factors, any further comments by policymakers on domestic monetary policy will also lend cues. Even without a rate hike in June, traders expect the RBI to signal monetary policy tightening, with the potential of higher overnight rates, dealers said. 

The movement in the rupee and overnight money market rates will also influence swaps. Tuesday, the one-year swap rate is seen at 6.00-6.40% and the five-year rate at 6.50-6.90%. On Monday, the one-year OIS rate ended at 6.15% and the five-year rate at 6.67%.

CALL

On 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 from primary dealers amid tight liquidity in the banking system. Since the RBI has no far not announced a variable rate repo auction for Tuesday, which traders were widely expecting, the call money rate may even rise to the Marginal Standing Facility rate of 5.50%, some dealers said. The one-day call money rate ended at 5.35% Monday.

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% Tuesday, while the weighted average tri-party repo market rate is likely to be in the range of 5.10-5.30%, they said.

RBI AUCTION

--Eight states to raise INR 134.50 billion via bond sale 1030-1130 IST

--RBI to conduct three-year, $5 billion dollar-rupee buy-sell swap auction 1030-1130 IST

LIQUIDITY

Total net inflow of INR 19.34 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 19.34 billion as coupon on state bonds

* Outflows

--Nil

End

US$1 = INR 95.23

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

Reported by Meera Nair

Edited by Deepshikha Bhardwaj

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