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Informist, Wednesday, Aug. 5, 2026

MUMBAI – Government bond prices and swap rates will take direction Thursday from the developments in West Asia and their impact on crude oil prices and US Treasury yields, dealers said. A fall in Brent crude oil price will lead to a fall in bond prices and swap rates, dealers said.

Government bond prices are likely to open higher if Brent crude oil stays below $80 per barrel and there is no escalation of the war in West Asia, dealers said. However, unless Brent crude comes down to at least $70 per barrel, swaps are unlikely to fall significantly, though traders are not expecting a hike in the repo rate at the Reserve Bank of India's Monetary Policy Committee meeting in October. Before Wednesday's decision by the rate-setting panel to hold the repo rate at 5.25% and keep the "neutral" stance unchanged, some traders were expecting a rate hike in October.

Thursday, the one-day interbank call money rate was seen near the RBI's repo rate of 5.25%, or higher, after the RBI, after market hours, said it would conduct a four-day variable rate reverse repo auction for INR 1.50 trillion Thursday. This is the first VRRR since Apr. 17 and comes immediately after Malhotra Wednesday said the central bank would use "two-way operations" to manage liquidity. Several traders, however, were expecting the announcement this week and, amid a lack of major outflows, the auction may not push overnight rates significantly higher, dealers said.

GOVERNMENT BONDS

Gilt prices may take cues from developments relating to the war in West Asia and their impact on crude oil prices and US Treasury yields, dealers said. Government bond prices are likely to open higher if Brent crude oil stays below $80 and there is no fresh escalation in West Asia, they said. The rise in bond prices is likely to be limited, however, as traders are expected to make space in their portfolios for the fresh supply of INR 320 billion at the weekly gilts auction Friday, dealers said. Traders will also track the results of the INR 200-billion bond buyback auction later in the morning, dealers said.

The government will buy back four securities maturing in the financial year 2026–27 (Apr-Mar). The gilts to be bought back are the 7.33%, 2026 bond, the 5.74% 2026 bond, the 8.15%, 2026 bond, and the 8.24%, 2027 bond. These were the same bonds the government had bought back at the previous auction. At that time, the maximum buyback was in the 7.33% 2026 gilt and the least in the 2027 paper. The cut-off prices at the auction were broadly in line with levels published by Financial Benchmarks India Ltd.

Any significant movement in the rupee and swap rates will also lend cues to gilts, dealers said. The 10-year benchmark 6.94%, 2036 bond ended at INR 101.17, or 6.7722% yield.

OIS RATES

Swap rates are seen opening largely steady but will track the overnight movement in crude oil prices. Unless Brent crude oil eases to near $70 per barrel, swaps are unlikely to fall significantly, even though traders no longer expect a hike in the repo rate at the October meeting of the RBI's rate-setting panel.

Swaps could move in a sticky range as some domestic and foreign banks' asset and liability managers could step in to receive fixed rates while some fund-raisers could receive rates to hedge their bond issuances if swap rates rise, dealers said. However, offshore traders could step up paying interest in swaps if crude oil prices stay high, dealers said. 

The view on the swap rate curve is still seen mixed, with expectations of both a steepening and a flattening. Short-term swaps could briefly inch up by 3-4 basis points if the RBI begins conducting variable rate reverse repo operations to drain excess rupee liquidity. Due to hefty inflows through foreign currency non-resident (banks) deposits, the shorter end of the swap rate curve could be anchored due to the liquidity boost while some traders may receive longer-term swaps to deploy the flows. The movement of the rupee and overnight borrowing rates will also lend cues. The one-year swap rate is seen in the range of 5.65-6.10% and the five-year in 6.07-6.40%. The one-year swap rate closed at 5.87% Wednesday. The five-year swap rate ended at 6.36%.

CALL

Thursday, the one-day interbank call money rate is seen near the RBI's repo rate of 5.25% or higher after the RBI, after market hours, said it would conduct a four-day variable rate reverse repo operation for INR 1.50 trillion Thursday. This is the first VRRR since Apr. 17 and comes immediately after Malhotra Wednesday said the central bank would use "two-way operations" to manage liquidity. Several traders, however, were expecting the announcement this week and, amid a lack of major outflows, the VRRR announcement may not push overnight rates significantly higher, dealers said. 

What is of comfort to traders is Malhotra acknowledging that the current surplus liquidity conditions will be short-lived, hence erasing expectations of the RBI bringing measures to absorb durable liquidity surplus. Traders now do not expect measures to drain durable liquidity such as a hike in the cash reserve ratio or RBI sales of government bonds at least in this quarter. Traders are also pricing out expectations of a hike in the repo rate in October after mildly "dovish" commentary Wednesday. 

In spite of the VRRR auction, overnight rates may fall near the Standing Deposit Facility rate by the end of trade Thursday amid a lack of major outflows. Surplus liquidity is seen remaining comfortable due to inflows from FCNR(B) deposits, dealers said. Dealers expect the call rate Thursday to be in the 4.60–5.30% range. 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 5.00–5.25% band, and that in the tri-party repo market is likely to be similar, they said.

RBI AUCTION

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

LIQUIDITY

Total net outflows of INR 116.07 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 148.77 billion for redemption of 91-day T-bills

--INR 137.00 billion for redemption of 182-day T-bills

--INR 50.13 billion for redemption of 364-day T-bills 

--INR 18.31 billion as coupon on state bonds

--INR 54.45 billion as coupon on 7.26%, 2033 gilt 

* Outflows

--INR 357.72 billion as payment for 91-day T-bills

--INR 97.00 billion as payment for 182-day T-bills

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

End

US$1 = INR 95.11

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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