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Informist, Thursday, Aug. 20, 2026

 

NEW DELHI – Government bond prices and overnight indexed swap rates are expected to track overnight movements in US Treasury yields and crude oil prices, dealers said. Traders will then focus on the INR-280-billion weekly gilt auction at 1030-1130 IST, where demand is expected to be tepid for the long-term bonds on offer, they said. 

 

At the auction, the government will sell INR 170 billion of the 7.06%, 2041 bond and INR 110 billion of the 7.43%, 2076 bond. The yield spread of the 7.06%, 2041 bond over the 10-year benchmark 6.94%, 2036 gilt has compressed to 17 bps, which may push it out of favour with investors picking up the fresh supply, dealers said.

 

Expectations of a repo rate hike in 2026-27 (Apr-Mar) have increased, with a potential rise as early as the next meetng of the Reserve Bank of India's Monetary Policy Committee meeting in October, dealers said. Minutes of the August policy meeting showed increased focus on curbing rising price pressures in the coming months, including through potential repo rate increases. The MPC has held the repo rate steady since cutting it to 5.25% in December. 

 

Meanwhile, the three-day interbank call money rate is expected to open near the RBI's repo rate of 5.25% due to early demand for funds from primary dealers amid outflows for goods and services tax, dealers said. During the day, the call money rate is seen at 4.60-5.30% Friday.

 

GOVERNMENT BONDS

Friday, gilts are expected to track overnight movements in crude oil prices and US Treasury yields. Traders expect the yield on the 10-year benchmark bond to hit 6.92% in the near term, though aggressive purchases are seen at around 6.89%, they said. Demand at the INR-280-billion gilt auction Friday is expected to be tepid, dealers said. The government will sell INR 170 billion of the 7.06%, 2041 bond and INR 110 billion of the 7.43%, 2076 bond. The yield spread of the 7.06%, 2041 bond over the 10-year benchmark has compressed to 17 bps, which is too aggressive, dealers said. 

 

Expectations of rate hikes are seen increasing, after the rate-setting panel focused on the potential for the same. Traders will watch foreign inflows and their impact on systemic liquidity, and whether these flows are deployed into gilts, with expectations of at least $15 billion in flows over the fortnight. Any significant movement in the rupee and swap rates will also lend cues, they said.

 

The yield on the 10-year benchmark 6.94%, 2036 bond is seen moving between 6.80% and 6.92%, dealers said. On Thursday, the bond ended at INR 100.47 or 6.8709%, the highest closing level for the 10-year benchmark yield since Jun. 12.

 

OIS RATES

Friday, swap rates are expected take cues from US Treasury yields and crude oil prices, especially from developments in the West Asia war. The sharp rise in OIS rates so far this week may lead to some traders receiving fixed rates if there is no significant movement on the global front, dealers said.

 

India's swap rates are pricing in a 75-100 basis point repo rate increase over the next 12 months starting in October. This is an extreme interpretation and is not a widespread base case among traders, who largely expect a 50-75 bps increase, dealers said. However, with inflation risks tilted to the upside, offshore traders may also pay fixed rates if the market does not price in at least 75 bps of rate increases, they said.

 

High crude oil prices continue to be a concern for traders as they may prompt the RBI's Monetary Policy Committee to raise interest rates. The movement of the rupee and overnight borrowing rates will also lend cues. With the central bank's special foreign currency non-resident (banks) deposit scheme now ending on Aug. 31 rather than Sept. 30, dealers do not expect onshore entities to heavily receive fixed rates even when they rise, with increased focus on overseas triggers.

 

The one-year swap rate is seen in the range of 5.70-6.00% and the five-year at 6.30-6.52%. On Thursday, the one-year rate ended at 6.94% and the five-year rate at 6.48%, both at their highest closing levels since Jul. 24. 

 

CALL

On Friday, the three-day interbank call money rate is expected to open near the RBI's repo rate of 5.25% due to early demand for funds from primary dealers amid GST payments, dealers said. The RBI will conduct a three-day VRRR auction for INR 1.50 trillion at 0930-1000 IST Friday, which should be subscribed for over INR 1.00 trillion, they said. On Thursday, the one-day call money rate ended at 5.20%.

 

Hefty surplus liquidity may allow banks to park their funds for higher returns at the auction. At the same time, GST payment outflows may top INR 1.50 trillion by Friday, which may limit participation in the VRRR auction despite a rollover of funds. Two RBI VRRR auctions worth INR 1.50 trillion are scheduled to reverse Friday. Traders have also begun watching for any drain in liquidity through currency in circulation ahead of the festival season.

 

Dealers expect the three-day call rate at 4.60–5.30% Friday. The one-day tri-party repo rate is expected to be in the 4.50–5.25?nd. The weighted average call rate is expected to be in the 5.05–5.20?nd, and the tri-party repo rate is likely to be at 4.90-5.20%, dealers said.

 

RBI AUCTION

--RBI to hold three-day variable rate reverse repo auction for INR 1.50 trillion 0930-1000 IST

--Govt to sell INR 280 billion of two bonds via auction at 1030-1130 IST

 

LIQUIDITY

Total net inflows of INR 14.18 billion. The calculation does not take into account redemption of the Standing Deposit Facility and scheduled variable rate repo and variable rate reverse repo operations.

 

* Inflows

--INR 14.18 billion as coupon on state bonds

--INR 1.50 trillion as reversal of two overnight variable rate reverse repos

 

* Outflows

--Nil

 

End

 

US$1 = INR 95.71

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

 

Reported by Aaryan Khanna

Edited by Avishek Dutta

 

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