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Informist, Wednesday, Jul. 22, 2026

MUMBAI – Government bond prices are seen down Thursday due to a rise in oil prices, but any such fall may be tempered by bets of robust foreign inflows through the Reserve Bank of India's concessional schemes and bets of India's inclusion in Bloomberg's flagship Global Aggregate Index. Swap rates are more susceptible to a sharp rise, especially due to offshore model and hedge funds paying fixed-rate contracts and traders hedging their bond purchases, dealers said. However, with the five-year OIS rate rising above the five-year gilt yield, traders may step in to receive the swap rate, they said. Movement of bond prices will also hinge on foreign portfolio investors' trade amid geopolitical turmoil, with FPIs net purchasing gilts worth INR 14.63 billion through the Fully Accessible Route Wednesday, the most since Jul. 9, and after net sales Tuesday.

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. 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 Thursday, the one-day interbank call money rate is likely to open above the RBI's repo rate of 5.25% as liquidity remains tight post outflows for goods and service tax payments, dealers said.

GOVERNMENT BONDS

On Thursday, bond prices are likely to remain volatile as strong demand for domestic bonds offsets concerns over the escalating conflict in West Asia, dealers said. Crude oil prices and US Treasury yields will continue to guide the direction of gilt prices, although the negative impact may be cushioned by purchases from banks, they said.

Towards the latter half of the day, traders may trim their holdings to make room for the fresh supply of gilts at the weekly auction 1030-1130 IST Friday. The government will sell INR 170 billion of a new 2041 gilt and INR 110 billion of the 7.43%, 2076 bond. Demand for the new 15-year benchmark gilt is seen firm, though traders have mixed views on how the 50-year paper would fare at auction, dealers said. 

Short-term bonds are expected to remain in favour with the pace of foreign 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% Thursday. 

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 10-year benchmark 6.94%, 2036 bond ended at INR 100.97, down from INR 101.02 Tuesday but off the day's low of INR 100.80 hit at the open. Its yield rose to 6.8012% Wednesday from 6.7938% the previous day.

OIS RATES

On Thursday, swap rates will track movements in crude oil prices and Indian government bond yields, dealers said. Receiving by foreign banks receiving FCNR(B) deposits and traders conducting reverse bond swaps may cap any rise in swap rates. Offshore traders are likely to continue paying fixed-rate contracts if the conflict in West Asia persists. Unless there is significant escalation in the war, views on domestic rate increases due to the potential impact on imported inflation are little changed, with greater concern on the depreciation of the rupee.

The one-year swap rate is roughly pricing in nearly three repo rate hikes within 12 months. Traders expect received flows from domestic banks' asset and liability management desks 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, current liquidity tightness is adding to an upward pressure on rates, dealers said. The overnight Mumbai Interbank Outright Rate has not been set below the repo rate since May 18.

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 one-year swap rate is seen in the range of 5.80-6.20% and the five-year at 6.30-6.56%. The one-year swap rate closed at 6.00%, up from 5.97% Tuesday and off the day's high of 6.03%. The five-year swap rate ended at 6.48%, up from 6.44% Tuesday.

CALL

On Thursday, the one-day interbank call money rate is likely to open above the RBI's repo rate of 5.25% as liquidity remains tight post 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 variable rate repos until the Centre's month-end expenditure begins, with the systemic liquidity seen falling into a deficit this week. Traders do not expect the RBI to conduct any measures to infuse durable liquidity amid inflows from foreign non-currency resident bank deposits. Dealers expect the call rate at 4.60–5.40% Thursday. The tri-party repo rate is expected to be in the 4.60–5.25% band. The weighted average call rate is expected to be in the 5.25–5.35% band, and that in the tri-party repo market is likely to be in the 5.10–5.25% band, they said. The one-day call money rate ended at 5.00% Wednesday, down from 5.35% at close Tuesday. 

RBI AUCTION

--Nil

LIQUIDITY

Total net inflows of INR 211.03 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 321.63 billion as redemption of 91-day Treasury bills

--INR 128.00 billion as redemption of 182-day T-bills

--INR 62.41 billion as redemption of 364-day T-bills

--INR 9.76 billion as coupon on state bonds

* Outflows

--INR 152.77 billion as payment for 91-day T-bills

--INR 88.00 billion as payment for 182-day T-bills

--INR 70.00 billion as payment for 364-day T-bills 

End

US$1 = INR 96.5650

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

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

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