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Informist, Thursday, Jun. 4, 2026

 

MUMBAI – Government bond prices are likely to track overnight developments in the West Asia conflict and any movement in crude oil prices, dealers said. Market attention will then swiftly shift to Reserve Bank of India Governor Sanjay Malhotra's statement following the Monetary Policy Committee's rate decision at 1000 IST, they added. Meanwhile, swap rates are expected to open largely unchanged ahead of the Monetary Policy Committee's policy decision, dealers said.

 

Most traders expect the MPC to maintain status quo on the repo rate at 5.25% and retain its policy stance at 'neutral'. Malhotra's statement is expected to focus on curbing inflation, setting the stage for rate hikes in the future. Should this base case arise, the 10-year gilt yield is seen easing to the 6.92-6.95% range as a minority of traders betting on a rate hike add to their portfolios, dealers said.  

 

Bond prices are expected to rise sharply if the RBI announces measures to encourage capital inflows, which will weaken the case for an interest rate defence of the floundering rupee. Various measures have been floated in recent days, including additions to bonds under the fully accessible route and an interest subvention plan for external commercial borrowing, to make the route more viable for corporates and banks. Traders expect the RBI to announce measures that will bring in $20 billion – $50 billion from overseas in FY27. In the best-case scenario, the 10-year gilt yield may fall to 6.85%, dealers said.

 

Traders expect the rate-setting panel to opt for a "hawkish hold" 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. 

 

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. 

 

The movement of crude oil prices and US Treasury yields could also lend cues, but the impact of the global triggers is likely to be limited intraday with larger focus on policy. Along with RBI Governor Sanjay Malhotra's address at 1000 IST, traders will also tune into the post-policy press conference at 1200 IST. 

 

After the policy outcome, traders will position for the scheduled release of India's GDP data for the March quarter, at 1600 IST. An Informist poll of 16 economists expects the GDP growth print at 7.3%, down from 7.8% in the December quarter, similar to traders' expectations. 

 

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

At open on Friday, bond prices may take cues from overnight developments in the West Asia conflict and their impact on crude oil prices, dealers said. Focus will almost immediately turn to RBI Governor Sanjay Malhotra's statement laying out the MPC's rate decision at 1000 IST, they said.

 

"The market is pricing in around 100 bps of rate hikes in a year's time. If the RBI announces big measures for the rupee, one of those rate hikes at the tail end will dissolve immediately," a dealer from the primary dealership said. 

 

However, a more adverse outcome of the MPC meeting could also take place. A rate hike of 25 bps on Friday might push the benchmark gilt yield up to 7.10-7.15%. A further rise is unlikely as state-owned banks are likely to add bonds to their portfolios at levels they consider attractive, dealers said. Moreover, inflationary pressures in the economy are seen fading soon if the MPC hikes rates pre-emptively. CPI inflation is expected to top 6% later in the financial year, topping the RBI's 2-6% target band, from 3.48% in April.

 

After the policy decision Friday, dealers will have the auction of the 6.94%, 2036 gilt to focus on, with several traders already making room for the fresh supply. Demand at the auction is likely to be determined by traders' takeaways from the RBI's comments, though the auction will sail through, dealers said.

 

The 10-year benchmark 6.48%, 2035 bond ended at INR 96.51, or 6.9931%, Thursday. The newer 6.94%, 2036 bond ended at INR 99.63, or 6.9920% yield. 

 

OIS RATES

On Friday, swap rates are likely to open steady ahead of the outcome of the Monetary Policy Committee's rate decision Friday, dealers said. However, if a peace deal between US and Iran is announced, swaps could tumble. Such a deal could also positively alter the MPC's commentary, though as long as oil supply chains are broken, the fear of inflation rising persists, dealers said. The uncertainty is about when the rate-setting panel will begin raising the repo rate, given the increased crude oil prices and rising inflation, they said.

 

Short-term swap rates have more scope for a fall Friday, and the one-year OIS could fall 10 to 20 bps if the MPC holds the repo rate steady, since it's currently pricing in around 100 bps of rate hikes within 12 months, dealers said. However, since a rate hike is seen inevitable, swaps maturing in more than a year could remain elevated, dealers said. 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 6.12% Thursday. The five-year swap rate ended at 6.63%.

 

CALL

On Friday, the three-day interbank call money rate is likely to open above the RBI's repo rate of 5.25%, as has been the case so far this week, with surplus liquidity generally on a downtrend, dealers said. Dealers expect the call rate to be in the 4.60–5.45% range. 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 5.20-5.30%, and the weighted average rate in the tri-party repo market is likely to be around 5.00-5.10%, they said.

 

The reversal of two-variable rate repo auctions for INR 288 billion is scheduled for Friday, which is expected to drain liquidity. Dealers expect a VRR auction Friday to compensate for the impact of the payments for the two VRR auctions.

  

The one-day call rate ended at 5.20% on Thursday, up from 4.75% Wednesday. The weighted average call rate was 5.27%, the same as the previous day.

 

RBI AUCTION

--Govt to auction one gilt worth INR 340 billion

 

LIQUIDITY

Total net inflows of INR 107.78 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 15.01 billion as coupon on state bonds

--INR 42.03 billion as coupon on 8.97%, 2030 gilt

--INR 50.73 billion as coupon on 6.57%, 2033 gilt

 

* Outflows

--INR 174.45 billion as reversal of three-day variable rate repo auction

--INR 113.60 billion as reversal of two-day variable rate repo auction 

 

End

 

US$1 = INR 95.7850

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

 

Reported by Meera Nair

Edited by Avishek Dutta

 

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