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Informist, Tuesday, Jun. 2, 2026

 

MUMBAI – Government bond prices are likely to open steady Wednesday as the Reserve Bank of India's Monetary Policy Committee's three-day meeting begins, with traders cautious ahead of the rate decision on Friday, dealers said. Meanwhile, gilts and swap rates may also track the movement of US Treasury yields after the release of jobs data in the world's largest economy. Gilts and swaps will also track crude oil prices and developments in the US-Iran peace negotiations, they said. 

 

Dealers hope the central bank will announce measures to curb the rupee's depreciation, weakening the case for a policy repo rate hike. Some dealers expect more dollar-rupee buy-sell swap auctions to be conducted after the RBI held one last week. Swaps could surge if the central bank does not announce measures to attract capital inflows at the policy decision Friday, dealers said. Traders expect the RBI to announce concessions on external commercial borrowings by banks and corporations, or subsidies on hedging costs for dollar exposure. The RBI could also offer concessions on interest rates on foreign currency non-resident deposits for banks, dealers said. Such measures could pull down money market rates while stabilising the rupee, dealers said.

 

Traders widely expect the rate-setting panel to keep the status quo on the repo rate in June. An Informist poll showed that 19 of 24 economists and market participants expect the rate-setting panel to keep the repo rate unchanged, while the remainder expect a repo rate hike. Rate hikes are expected to begin in August or October, dealers said. RBI Governor Malhotra's commentary is expected to set the stage for monetary policy tightening, as CPI inflation is seen averaging 5.0% in 2026-27 (Apr-Mar), above the central bank's April forecast of 4.6% and its 4% retail inflation target. The RBI is also expected to trim its FY27 GDP growth estimate to around 6.5% from 6.9%. The central bank is likely to focus on keeping inflationary expectations in check for the next few months rather than prioritising growth, dealers said. 

 

Traders expect the rate-setting panel to opt for a "hawkish hold" on the repo rate Friday. At least one of the three external members of the Monetary Policy Committee could vote for a rate hike, dealers said. A few traders expect the committee to change its stance to "withdrawal of accommodation" from neutral. Traders also expect the RBI to cut its GDP growth forecast for the financial year 2026-27 (Apr-Mar) by 20-30 basis points while the estimate for FY27 CPI inflation could be raised to above 5% from 4.6% currently, dealers said. If the inflation forecast is raised by 50 bps, the rate hike cycle could be quicker, dealers said. 

 

GOVERNMENT BONDS

Government bond prices are seen steady Wednesday as the MPC's three-day meeting begins, with traders cautious ahead of the rate decision on Friday, dealers said. Major developments in the West Asia war and their impact on crude oil prices may provide direction to gilt prices at the open, though global triggers may be less important for gilt prices before the domestic rate decision.

 

The 10-year benchmark 6.48%, 2035 bond ended at INR 96.38 or 7.0129%, Tuesday. The newer 6.94%, 2036 bond ended at INR 99.59 or 6.9977% yield. 

Traders may begin to look through the volatility in crude oil prices this week, as it may not immediately make a case for rate changes. However, an overnight US-Iran peace deal would drive the 10-year gilt yield down to 6.90%, while a return of the two countries to outright hostilities could push it as high as 7.10%, dealers said.

 

After the rate decision, dealers have the INR-340-billion auction of the 6.94%, 2036 gilt to focus on, with several traders already making room for the fresh supply. Immediately after that is the scheduled release of India's GDP data for the March quarter at 1600 IST Friday.

 

OIS RATES
Wednesday, swap rates will track the movement of US Treasury yields after the release of jobs data in the world's largest economy. However, traders will refrain from taking fresh positions ahead of the outcome of the MPC meeting, dealers said. Most traders are cautious ahead of the policy decision Friday because of uncertainty on when the rate-setting panel will begin raising the repo rate due to increased crude oil prices, they said. The one-month swap rate is pricing in less than 25 bps of a rate hike in June, dealers said. 

 

Traders have mixed views on liquidity, with some saying it will be comfortable once the RBI's transfer of surplus to the Centre for FY26 is reflected in the banking system. Others expect the overnight Mumbai Interbank Outright Rate to remain above the repo rate as the central bank is unlikely to infuse durable liquidity in the system to avoid pushing up inflation, dealers said. 

 

Movement in the rupee and overnight money market rates will also influence swaps. The one-year swap rate is seen at 5.90-6.40% and the five-year at 6.50-6.90%. The one-year swap rate ended at 6.09%, down from 6.12% Monday. The five-year OIS rate ended at 6.60%, down from 6.64% Monday. 

 

CALL

On Wednesday, the one-day interbank call money rate is likely to open near the RBI's repo rate of 5.25%, on demand for funds from primary dealerships and some banks amid low surplus liquidity in the banking system, dealers said. Dealers expect the call rate to be in the 4.60–5.35% range on Wednesday, while the tri-party repo rate is expected to be in the range of 4.90–5.25%. The weighted average call rate is expected to be in the range of 5.20-5.30%, and that in tri-party repo market is likely to be around 5.15-5.25%, they said.

 

On Wednesday, an outflow of INR 241 billion is scheduled for the payment of state bonds. The auction was conducted Tuesday. Dealers do not expect the outflow to push up overnight market rates as it is not a significant amount, dealers said. Additionally, the central bank will conduct yet another variable rate repo auction of INR 500 billion for two days Wednesday, which may cap a rise in rates, dealers said. Tuesday, the one-day call rate ended at 5.35%, up from 4.85% Monday. The weighted average call rate was 5.28%, slightly down from 5.30% Monday.

 

RBI AUCTION

--RBI to auction 91-day T-bills worth INR 120 billion

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

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

--RBI to hold 2-day VRR auction for INR 500 billion 0930-1000 IST 

 

LIQUIDITY

Total net outflows of INR 191.21 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 18.82 billion as coupon on state bonds

--INR 30.98 billion as coupon on 7.04%, 2029 gilt

 

* Outflows

--INR 241.00 billion as payment for state bonds

 

End

 

US$1 = INR 95.2650

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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