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Informist, Tuesday, Jul. 21, 2026

 

MUMBAI – Government bond prices are seen falling and overnight indexed swap rates are seen rising Wednesday as near-month Brent crude oil futures rose further after market hours to hit $92 per barrel. A fall in bond prices may be tempered by bets of robust foreign inflows through the concessional schemes. Bets of India's inclusion in Bloomberg's flagship Global Aggregate Index persist, also limiting a fall in bond prices. Swap rates are more susceptible to a sharp rise, especially due to offshore model and hedge funds paying fixed-rate contracts, dealers said.

 

Traders remain cautious about developments in West Asia and the movement of US Treasury yields closer to the US Federal Open Market Committee's meeting later this month. News regarding the inclusion of Indian gilts in Bloomberg's flagship index and foreign capital inflows following the measures announced by the RBI last month will also be tracked. Several traders have pushed back expectations of the Bloomberg review being published this month to August and even September.

 

Traders will also track the progress of Southwest monsoon current as deficient rainfall will contribute to higher inflation, they said. However, domestic inflation is largely in check as of now, dealers said, barring the imported inflation from a rise in oil prices. Traders now look to gauge whether the RBI's Monetary Policy Committee will raise the repo rate in October to curb inflation and stabilise the depreciating rupee. 

 

The movement in the rupee could also lend cues, with traders concerned about its depreciation despite the central bank deploying measures to offset the fall. The RBI's intervention in the foreign exchange market has also spurred a drain of rupee liquidity. 

 

On Wednesday, the one-day interbank call money rate is seen above the RBI's repo rate of 5.25% amid outflows for goods and service tax payments, dealers said.

 

GOVERNMENT BONDS

On Wednesday, bond prices may experience continued volatility as positivity on demand for domestic bonds counteracts the impact of increasing escalations in the West Asia conflict, dealers said. Crude oil prices and US Treasury yields will continue to guide the trajectory of gilt prices even if the negative impact is dulled by bank purchases, they said.

 

Data released by the RBI showed that its schemes to attract foreign capital launched in early June had drawn inflows of $20.72 billion by Friday. FCNR(B) deposits alone brought in $17.41 billion since the concessional swap window for banks was rolled out on Jun. 8, the RBI said. Short-term bonds are expected to remain in favour with the pace of these inflows seen increasing in the coming days, even if longer-term bonds are more sensitive to global triggers, dealers said. The yield on the 10-year benchmark 6.94%, 2036 gilt is seen in a range of 6.72-6.84% Wednesday. 

 

Demand for bonds maturing in under three years is not seen as robust as the foreign exchange inflows have come in without a corresponding rise in rupee liquidity with banks, despite their conversion of the funds using the concessional swap windows provided by the RBI. The total inflow number under the schemes suggests an increase in banking system rupee liquidity by nearly INR 2.0 trillion, while the frictional liquidity remains below INR 1.5 trillion on most days. Dealers also remain expectant of further flows on the view that Bloomberg will announce the inclusion of Indian sovereign bonds in its flagship Global Aggregate Index soon.

 

The depreciation of the rupee against the dollar is a concern for some traders, as the fall comes despite the RBI deploying various measures to prevent it. The 10-year benchmark 6.94%, 2036 bond ended at INR 101.02, down from INR 101.14 Monday. Its yield rose to 6.7938% Tuesday from 6.7770% the previous day.

 

OIS RATES

On Wednesday, swap rates will continue to track movements in crude oil prices and US Treasury yields, dealers said. Offshore traders are likely to continue paying fixed-rate contracts if the conflict in West Asia persists. The developments in West Asia will also influence traders' views on domestic rate increases due to the potential impact on imported inflation.

 

The one-year swap rate is roughly pricing in nearly three repo rate hikes within 12 months. Traders will also keep track of any received bets by domestic banks' asset and liability management desks, with aggressive flows from them pausing amid a rise in crude oil prices. Traders expect these received flows to step up if the five-year OIS rises to around 6.70%. 

 

Traders have mixed views on the trajectory of the swap rate curve, with some expecting the curve to steepen – wherein longer-term swap rates rise faster than short-term ones as foreign inflows received through the various schemes are robust and keep short-term rates anchored due to the liquidity boost. Traders expect flows totalling around $40 billion by the first week of August. 

 

However, a further rise in crude oil prices could put upward pressure on short-term rates as well, as rate hikes by the RBI's Monetary Policy Committee become more imminent. The overnight Mumbai Interbank Outright Rate has not been set below the repo rate since May 18. The one-year swap rate is seen in the range of 5.80-6.10% and the five-year at 6.25-6.52%. The one-year swap rate closed at 5.97%, up from 5.95% Monday. The five-year swap rate ended at 6.44%, up from 6.41% Monday.

 

CALL

On Wednesday, the one-day interbank call money rate is seen above the RBI's repo rate of 5.25% amid outflows for goods and service tax payments, dealers said. Traders will also assess the drain on rupee liquidity due to the RBI's dollar sales in the foreign exchange spot market. Traders expect the RBI to continue to hold VRRs until the Centre's month-end expenditure begins, with the systemic liquidity seen falling into a deficit this week. Dealers expect the call rate at 4.60–5.40% Wednesday. The tri-party repo rate is expected to be in the 4.60–5.30?nd. The weighted average call rate is expected to be in the 5.25–5.35?nd, and that in the tri-party repo market is likely to be in the 5.10–5.27?nd, they said. The one-day call money rate ended at 5.35% Tuesday, up from 5.30% at close Monday. The weighted average call rate was 5.35%, inching higher from 5.34% Monday.  

 

RBI AUCTION

--RBI to auction 91-day T-bills worth INR 90 billion

--RBI to auction 182-day T-bills worth INR 80 billion

--RBI to auction 364-day T-bills worth INR 70 billion 

 

LIQUIDITY

Total net outflows of INR 195.55 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 15.67 billion as coupon on state bonds

--INR 3.69 billion as coupon on 7.37%, 2054 sovereign green bond

 

* Outflows

--INR 214.91 billion as payment for state bonds 

 

End

 

US$1 = INR 96.24

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

 

Reported by Cassandra Carvalho

Edited by Akul Nishant Akhoury

 

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