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Informist, Tuesday, May 26, 2026

MUMBAI – Government bond prices and overnight indexed swap rates are likely to take cues from developments related to the US-Iran war and its impact on Brent crude oil prices, dealers said.

If there are no fresh development on the West Asia front, state-owned banks are expected to step up purchases of government bonds 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.

If the war continues and military operations resume in West Asia, traders may unwind their received bets on fears of higher inflation percolating into India through imports. If the war does not end, the chances of the MPC raising the policy repo rate in June will increase, they said. The Strait of Hormuz has been closed for nearly three months since the US and Israel bombed Tehran and killed Iran's supreme leader. In peacetime, around 20% of the world's oil and half of India's crude demand transmitted the vital waterway.

While OIS rates will be driven mainly by global factors, any further remarks from policymakers on domestic monetary policy will also provide direction. Even if there is no rate hike in June, traders expect the RBI to signal tighter monetary policy, with the potential of higher overnight rates, dealers said. However, some dealers hope that the central bank will announce measures to curb the rupee's depreciation before the MPC meeting, weakening the case for a policy repo rate hike.

GOVERNMENT BONDS 

Wednesday, bond prices are likely to take cues from developments related to the US-Iran war and movement in Brent crude oil prices, dealers said. The yield on the 10-year benchmark 6.48%, 2035 bond is seen in the 6.95-7.05% range. If the RBI announces a measure to support the rupee, bond prices could see a rally on the likely recovery of the domestic currency. Announcement of a peace deal between the US and Iran could also pull the benchmark yield towards the 6.85% level, dealers said. On other hand, a setback in peace negotiations and a rise in crude oil prices could move the 10-year gilt yield above 7.05%, dealers said. The 10-year benchmark 6.48%, 2035 bond ended at INR 96.50, sharply higher than INR 96.28 Monday.

OIS RATES

On Wednesday, 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. However, the exchange in attacks between the US and Iran Tuesday have led to some of the optimistic traders unwinding their received fixed rate bets. The one-year swap rate fell slightly to 6.14% from 6.15% Monday, after rising to 6.20% earlier Tuesday.

The movement in the rupee and overnight money market rates will also influence swaps. Wednesday, the one-year swap rate is seen at 6.00-6.40% and the five-year at 6.50-6.90%.

CALL

On Wednesday, the two-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 and some banks, dealers said. A few dealers expect the RBI to come up with the variable rate repo auction Wednesday as the surplus liquidity remains under INR 1 trillion and the weighted average call rate may be above the policy repo rate. The one-day call rate ended 5.30%, down from 5.35% Monday.

Dealers expect the call rate to be in the 4.70–5.50% range 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 5.25-5.35% Wednesday, 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 auction 91-day T-bills worth INR 120 billion on Wednesday

--RBI to auction 182-day T-bills worth INR 60 billion on Wednesday

--RBI to auction 364-day T-bills worth INR 60 billion on Wednesday

LIQUIDITY

Total net outflow of INR 65.19 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 27.72 billion as coupon on state bonds

--INR 10.00 billion on redemption of state bonds

--INR 13.34 billion as coupon on 7.02%, 2027 gilts

* Outflows

--INR 116.25 billion as payment for state bonds

End

US$1 = INR 95.68

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

Reported by Meera Nair

Edited by Akul Nishant Akhoury

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