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Informist, Saturday, Aug. 1, 2026

MUMBAI – Government bond prices are likely to fall sharply Monday after Bloomberg Index Services Ltd. said after Indian market hours Friday that it has deferred the inclusion of India's Fully Accessible Route bonds in its flagship Global Aggregate Index. Overnight indexed swap rates are seen rising tracking a rise in government bond yields. Both government bond prices and swap rates will also track US Treasury yields and the price of Brent crude oil, dealers said.

The index provider noted that positive developments have taken place since its last update in January but said more time is warranted to make a decision. It said recent regulatory and policy changes improve market access for foreign portfolio investors, reduce operational complexity, and improve the efficiency of settlement, responding to several issues raised at the previous update in January. Still, enhancements have not been completely reflected in day-to-day market practice, which is essential for the flagship benchmark for global investment-grade fixed income, Bloomberg Index Services said. It did not give a timeline for the next update.

The yield on the 10-year US Treasury note topped 4.74% after market hours Friday, which is likely to trigger aggressive paying by offshore participants as the interest rate differential between safe-haven assets and emerging market rates narrows, making the latter less appealing. This will lead to a fall in bond prices and rise in swap rates.

Traders also await the decision of the RBI's Monetary Policy Committee meeting next week, with traders expecting status quo on the repo rate, though commentary could lean towards prioritising inflation control with economic growth still seen to be strong. The RBI is unlikely to alter its forecasts on growth and inflation, with the central bank likely to flag uncertainty on the geopolitical and crop harvest front, dealers said. However, traders are bracing for a firmer policy commentary and tone with US Treasury yields and Brent crude oil prices rising, adding to the pressure on the rupee.

The one-day interbank call money rate Monday is likely to open around the RBI's repo rate of 5.25% on early funding requirements from primary dealerships and some banks, dealers said. Surplus liquidity is expected to increase over the weekend owing to inflows from the Centre's month-end expenditure, dealers said. Traders also expect inflows from foreign currency non-resident (banks) deposits to support the rise in surplus liquidity in the banking system.

GOVERNMENT BONDS

Monday, gilt prices may fall depending on where the price of Brent crude oil is, after Bloomberg Index Services, after market hours Friday, said it had deferred the inclusion of Indian government bonds in its flagship $70-trillion Global Aggregate Index.

Monday's fall is likely to worsen as it comes just after traders picked up INR 340 billion of the 10-year benchmark 6.94%, 2036 gilt at auction Friday. However, continued inflows from FCNR(B) deposits are likely to limit the negative impact of the war in West Asia and the Bloomberg announcement, dealers said. The 10-year benchmark gilt yield is seen in the range of 6.80–6.95%. The yield on the 10-year benchmark gilt is seen opening near 6.90%, with a further rise likely later in the session.

On the domestic front, traders and economists almost universally expect the rate-setting panel to retain the policy repo rate at 5.25%, with June data showing retail inflation remained well within the RBI's 2-6% target band. The policy stance is also seen being retained at "neutral". Pressure to tighten monetary policy is expected to mount on the RBI later in the year, as the US Federal Reserve is expected to increase policy rates in 2026, with a tightening interest rate differential pressuring the rupee. The CME FedWatch tool showed an 83% probability that the Fed funds target rate would be hiked by December, with around 60% expecting the increases to come as early as the next meeting in September. The 10-year 2036 bond ended at INR 100.73 Friday, or 6.8343% yield.

OIS RATES

Monday, swap rates are seen rising tracking a rise in government bond yields, along with US Treasury yields and Brent crude oil price, dealers said. The 10-year government bond yield could rise by as much as 10 basis points Monday, depending on where the price of Brent crude oil is, after Bloomberg Index Services deferred the inclusion of Indian gilts in its flagship $70-trillion Global Aggregate Index. The rise in bond yields was tempered the past two months as traders priced in the possibility of an inclusion, while swap rates had risen tracking a rise in global yields.

Receiving by banks hedging FCNR(B) deposits may cap the rise in swap rates to an extent. The movement of the rupee and overnight borrowing rates will also lend cues. The one-year swap rate is seen in the range of 5.80–6.15% and the five-year at 6.20–6.70%. The one-year swap rate closed at 5.92% Friday. The five-year swap rate ended at 6.41%.

CALL

The one-day interbank call money rate Monday is likely to open around the RBI's repo rate of 5.25% on early funding requirements from primary dealerships and some banks, dealers said. The surplus liquidity is expected to increase over the weekend on inflows from the Centre's month-end expenditure, they said. Traders also expect the inflows from FCNR(B) deposits to support the rise in surplus liquidity in the banking system, they said. The inflows are expected to keep money market rates near the lower end of the Liquidity Adjustment Facility corridor.

Dealers expect the call rate Monday to be in the 4.60–5.45% range. The tri-party repo rate is expected to be in the 4.60–5.40% band. The weighted average rate in the call market is seen at 5.25–5.40% and that in the tri-party repo market is likely to be in the 5.15–5.25% band, they said. The two-day call money rate ended at 4.85% Saturday. The weighted average call rate was 4.95%.

RBI AUCTION

--Govt to buy back four 2026-27 (Apr-Mar) gilts worth INR 200 billion via auction

LIQUIDITY

Total net outflows of INR 194.57 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 10.18 billion as coupon on state bonds Sun

--INR 35.68 billion as coupon on 8.26%, 2027 gilt Sun

--INR 50.70 billion as coupon on 8.32%, 2032 gilt Sun

--INR 13.39 billion as coupon on state bonds Mon

--INR 35.49 billion as coupon on 5.77%, 2030 gilt Mon

* Outflows

--INR 340.00 billion as payment for gilts Mon 

End

US$1 = INR 95.3800

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

Reported by Janwee Prajapati

Edited by Rajeev Pai

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