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Informist, Tuesday, Jul. 28, 2026

MUMBAI – Volume and price action in the government bond and overnight indexed swap markets are likely to be subdued Wednesday on caution ahead of the US Federal Open Market Committee's interest rate decision at 2330 IST. Traders will closely track the movement of US Treasury yields ahead of the decision, along with crude oil prices and developments on the war in West Asia. As of 2050 IST, Fed fund futures are pricing in a 71% chance of the Fed keeping the rate unchanged on Wednesday, and over a 29% chance of a 25 basis point rate hike, according to the CME FedWatch tool. 

The pressure on the Reserve Bank of India's Monetary Policy Committee to tighten monetary policy is seen mounting later in the year as the US FOMC is expected to raise policy rates in 2026, with a tightening interest rate differential seen pressuring the rupee. However, the US rate-setting panel is expected to stand pat on rates on Wednesday, dealers said. The movement of the rupee and overnight borrowing rates will also lend cues.

On Wednesday, the one-day interbank call money rate is seen opening near the RBI's repo rate of 5.25%, though rates could ease further in the day with funds locked up in initial public offerings likely to be released by the end of the day, dealers said.

GOVERNMENT BONDS

On Wednesday, gilt prices will take direction from the overnight movement in crude oil prices and US Treasury yields at the opening, dealers said. Dealers also expect further flows on the view that Bloomberg will announce the inclusion of Indian sovereign bonds in its flagship Global Aggregate Index soon. The yield on the 10-year benchmark 6.94%, 2036 gilt is seen in a range of 6.70-6.83% Tuesday. The 10-year benchmark 6.94%, 2036 bond ended at INR 101.14, or 6.7774% yield Tuesday.

OIS RATES

Wednesday, swap rates are seen tracking movements in near-month Brent crude oil prices and US Treasury yields, with the latter lending cues ahead of the key interest rate decision by the US FOMC. Traders will also track the movement in government bond yields, especially the five-year bond, with close attention on its spread with the five-year swap rate. A sharp drop in volumes is likely to persist Wednesday, and possibly going into the next week, until traders take positions before the MPC outcome, dealers said. 

Offshore traders are seen paying fixed-rate contracts as the interest rate differential between safe-haven debt such as US Treasuries and emerging market rates such as Indian swap rates narrows, making the latter less appealing. Receiving by foreign and private-sector banks hedging foreign currency non-resident bank deposits and traders conducting reverse bond swaps may cap any rise in swap rates. The one-year swap rate is seen in the range of 5.80-6.10% and the five-year at 6.20-6.50%. Tuesday, the one-year swap rate closed at 5.88% and the five-year swap rate ended at 6.35%.

CALL

On Wednesday, the one-day interbank call money rate is seen opening near the RBI's repo rate of 5.25%, though rates could ease further in the day with funds locked up in initial public offerings likely to be released by the end of the day, dealers said. The RBI will conduct an overnight variable rate repo auction for INR 500 billion Wednesday, which may also cap a rise in money market rates, depending on the subscription. Inflows through foreign currency non-resident bank deposits may also aid systemic liquidity. Traders will also assess the drain on rupee liquidity due to the RBI's dollar sales in the foreign exchange spot market. Nearing the end of the week, there may be upward pressure on rates closer to the end of the reporting fortnight. 

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 4.60–5.45% Wednesday. 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 5.10–5.35% band, and that in the tri-party repo market is likely to be in the 5.00–5.25% band, they said. The one-day call money rate ended at 5.35% Tuesday, with the weighted average call rate at 5.31%.

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

--RBI to hold overnight variable rate repo auction for INR 500 billion 0930-1000 IST

LIQUIDITY

Total net outflows of INR 43.83 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 22.93 billion as coupon on state bonds

--INR 126.04 billion as inflow from Centre's bond buyback auction conducted Tuesday

* Outflows

--INR 192.80 billion as payment on state bonds

End

US$1 = INR 95.85

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

Reported by Cassandra Carvalho

Edited by Saji George Titus

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