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Informist, Wednesday, Jun. 3, 2026

MUMBAI – Government bond prices are likely to remain steady Thursday ahead of Friday's Monetary Policy Committee's rate decision, dealers said. Crude oil prices and US Treasury yields may guide gilts intraday, but dealers are expected to square off by close. Meanwhile, swap rates will track crude oil prices and updates on US-Iran peace talks.

As for the fresh developments Wednesday, the addition of more gilts under the fully accessible route is unlikely to bring in foreign inflows since bonds under this method are already available to purchase, dealers said. However, a tax cut on FPI's bond purchases would be beneficial for bond prices, dealers said. The yield on the 10-year benchmark bond could fall to 6.95% if such a tax cut is announced, or if concessions related to foreign exchange to bring in capital flows are given, dealers said. The 10-year benchmark yield is seen in a range of 6.90-7.20% on Friday, depending on the tone of the policy and the measures the central bank is expected to announce.

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.

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.

GOVERNMENT BONDS

Government bond prices are seen steady Thursday ahead of the MPC rate decision on Friday, dealers said. Short sales before the INR-240-billion auction Friday could weigh on 10-year bonds. Crude oil prices and US Treasury yields may provide direction to gilt prices intraday, but dealers are likely to square off by close. Some traders expect yields to soften on bets that the policy decision will be less restrictive than expected. 

Traders widely expect the rate-setting panel to keep the status quo on the repo rate in June. Rate hikes are expected to begin in August or October, dealers said. Bond yields are pricing in a rate hike later on in the year and could rise by 3 to 5 basis points if the MPC hikes the repo rate Friday, dealers said. RBI Governor Sanjay Malhotra's commentary is expected to set the stage for monetary policy tightening. The RBI is also expected to trim its 2026-27 (Apr-Mar) 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 and any diversion from this expectation could see yields falling, dealers said. 

Globally, 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%.

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. An Informist poll of 16 economists expects the figure at 7.3%, down from 7.8% in Oct-Dec. 

The 10-year benchmark 6.48%, 2035 bond ended at INR 96.31, or 7.0240%, Wednesday. The newer 6.94%, 2036 bond ended at INR 99.40, or 7.0240% yield. 

OIS RATES

Thursday, swap rates will take direction from crude oil prices and developments in the US-Iran peace negotiations. However, traders will refrain from taking fresh positions ahead of the outcome of the Monetary Policy Committee's rate decision Friday, dealers said. Most traders are cautious ahead of the policy decision because of uncertainty on when the rate-setting panel will begin raising the repo rate, given the increased crude oil prices and rising inflation, they said.

Traders expect the rate-setting panel to opt for a "hawkish hold" on the repo rate Friday. One of the three external members of the panel may vote for a rate hike, dealers said. A few traders expect the panel 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. 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 measures, 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 6.11% Wednesday. The five-year OIS rate ended at 6.63%, up from 6.60%.

CALL

On Thursday, the one-day interbank call money rate is likely to continue to open near the RBI's repo rate of 5.25% or above, as has been this week, as surplus liquidity remains tight, dealers said. Dealers expect the call rate to be in the 4.60–5.45% range on Thursday, while the tri-party repo rate is expected to be in the range of 4.90–5.30%. The weighted average call rate is expected to be in the range of 5.25-5.30%, and that in tri-party repo market is likely to be around 5.10-5.15%, they said.

Inflows of Treasury bill redemptions and bond coupon payments Thursday will be partially offset by payment for 91-day T-bills worth INR 151 billion. The size of the outflow reduced by INR 120 billion after RBI did not accept any bids for the 182-day and 364-day T-bills at the auction Wednesday, boding well for systemic liquidity, dealers said.  

The one-day call rate ended at 4.75% Wednesday, down from 5.35% Tuesday. The weighted average call rate was 5.27%, marginally down from 5.28% Tuesday. 

RBI AUCTION

--NIL

LIQUIDITY

Total net inflows of INR 172.35 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 155.000 billion as coupon on 91-day T-bills

--INR 85.14 billion as coupon on 182-day T-bills

--INR 50.17 billion as coupon on 364-day T-bills

--INR 29.67 billion as coupon on state bond

--INR 3.37 billion as coupon on 6.13%, 2028 gilt

* Outflows

--INR 151.00 billion as payment for 91-day T-bills

End

US$1 = INR 95.71

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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