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Informist, Thursday, Jul. 9, 2026

MUMBAI – Traders in the government bond and overnight indexed swap markets are expected to be cautiously optimistic while trading Friday, with overnight developments in West Asia war and Brent crude oil prices to lend direction at opening, but bets of India's inclusion in Bloomberg's flagship Global Aggregate Index limiting any fall in prices or rise in swaps, dealers said. Some dealers are of the view that the optimism in the market on higher bond prices has toned down but not vanished, with many viewing the current rise in crude oil prices as short-lived. Largely, the rise in crude oil price has also been contained, boding well for gilt prices in the longer run, they said.

Moreover, traders also do not expect a rate hike in India in August or October, limiting a rise in rates, they said. Traders will also track movement in US Treasury yields and inflows from the Reserve Bank of India's measures announced last month to shore up capital, dealers said. Several bankers have said that inflows from foreign currency non-resident bank deposits so far have been below expectations. Systemic liquidity will also be in focus, with the RBI's dollar sales in the foreign exchange spot market likely to have drained rupee liquidity this week. 

GOVERNMENT BONDS

Friday, traders will closely track overnight developments in prices of Brent crude oil and US Treasury yields, dealers said. Any escalation in the West Asia war would pull down bond prices and push the yield on the 10-year benchmark bond to 6.80%, dealers said. The 10-year 2036 bond is seen moving between 6.73% and 6.78%, with 6.78% being seen as the next crucial level for the gilt, dealers said.

The result of the weekly gilts auction is also expected to lend cues to bond prices, dealers said. The government will sell INR 210 billion of the 6.36%, 2031 bond and INR 110 billion of the 7.71%, 2066 bond at the auction. Demand is seen firm, with banks likely to bid aggressively for the 2031 bond for asset and liability management, dealers said. Meanwhile, insurers and pension funds are likely to bid for the 2066 bond, they said. However, the underwriting fees may be higher for the bonds Friday as geopolitical uncertainty amid fears of resumption of the US-Iran war may dampen demand at the auction, dealers said.

Bond prices are likely to take cues from any news about the inclusion of Indian government bonds in Bloomberg's Global Aggregate Index. Traders expect Bloomberg to publish its review between Jul. 15 and the end of the month. Most traders expect an inclusion, though some technical difficulties for foreign portfolio investors purchasing bonds persist, dealers said.

Traders are also likely to remain cautious ahead of the release of India's inflation data for June on Monday, dealers said. The print is expected to be on the higher side, reflecting the rise in energy prices. Deficient southwest monsoon rainfall will also contribute to higher inflation, they said. The 10-year benchmark bond ended at INR 101.33 on Thursday, up from INR 101.24 Wednesday. The yield on the bond settled at 6.7517%, against 6.7636% at the end of the previous session. 

OIS RATES

On Friday, swap rates are seen tracking overnight developments in West Asia to gauge whether the ceasefire between the US and Iran will hold. The related movement in crude oil prices and US Treasury yields are likely to move OIS rates amid lack of scheduled domestic rate triggers, dealers said. An escalation in the conflict is likely to lead to swap rates rising by another 10 basis points as traders price in a domestic rate hike in August or October.

The next domestic rate trigger is the release of CPI data for June on Monday, which traders expect will top the RBI's medium-term target of 4%. This is the last retail inflation reading scheduled before the MPC's meeting in August. 

Deficient rainfall and higher food prices are expected to push up retail inflation in the coming months, while the RBI is likely to drain systemic liquidity ahead of a likely rate hike cycle, dealers said. However, no rate hike is expected until December after assessing recent commentary from RBI officials, they added.

Traders await Bloomberg's decision on the inclusion of gilts in its flagship index, with most traders betting on an inclusion. Traders also expect overnight rates to ease due to a liquidity boost from inflows into foreign-currency non-resident bank deposits.

The movement of the rupee could also lend cues. The one-year swap rate is seen in the range of 5.70-5.95% and the five-year at 6.06-6.32%. The one-year swap rate closed at 5.81% Thursday, slightly higher than 5.80% Wednesday. The five-year swap rate ended at 6.21%, flat against the previous close. 

CALL

On Friday, the three-day interbank call money rate is seen at or above the RBI's repo rate of 5.25% amid tight liquidity, dealers said. Traders will continue to gauge the liquidity drain from intervention by the RBI in the spot rupee market. Post market hours on Thursday, the RBI said it would conduct a three-day VRR for INR 500 billion Friday, despite the redemption of the 8.33%, 2026 gilt of over INR 310 billion Thursday.

The outlook on expected inflows through the RBI's measures to shore up capital is seen hazy, with several banks yet to internally finalise their leveraging schemes on foreign currency non-resident bank deposits and some fundraisers refraining from overseas borrowing due to high spreads amid large supply. Systemic liquidity is expected to improve if foreign currency non-resident bank deposits pick up pace. Banks hedging deposits under the central bank's concessional swap window will gain rupee liquidity, potentially easing money market rates, dealers said. 

Dealers expect the call rate to be at 4.60–5.40% Friday. The tri-party repo rate is expected to be in the 4.90–5.50% band. The weighted average call rate is expected to be in the 5.20–5.30% band, and that in the tri-party repo market is likely to be in the 5.10–5.30% band, they said. The one-day call money rate ended at 5.34% on Thursdau, against 5.30% Wednesday. The weighted average call rate was 5.34%, against 5.27% Wednesday.

LIQUIDITY

Total net inflows of INR 15.82 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 15.82 billion as coupon on state bonds

* Outflows

--INR 467.29 billion as reversal of overnight variable rate repo tender

End

US$1 = INR 95.39

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

Reported by Cassandra Carvalho

Edited by Avishek Dutta

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