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Informist, Tuesday, Sept. 1, 2026

MUMBAI – Government bond prices and overnight indexed swap rates are likely to track developments in the war in West Asia and Brent crude oil prices at the open Wednesday, dealers said. They will also track movements in US Treasury yields, which are under pressure from heavy supply and inflation fears, they said. The Reserve Bank of India will auction INR 240 billion worth of Treasury bills on the day.

Traders have shifted their attention to the US Federal Open Market Committee's decision, scheduled for Sept. 15–16, which will be a key trigger for the RBI's Monetary Policy Committee's decision on the repo rate in October, dealers said. Given the increased expectation of a rate hike in the US, some traders expect the RBI to announce measures to absorb excess liquidity from the banking system to set the stage for a smooth transmission of rate hikes, dealers said.

Traders now expect the yield curve to flatten. The supply of government securities for the second half of the current financial year will also play a key role in the movement of the yield curve, dealers said. Some traders expect the state government borrowing calendar for the December quarter to be similar in size to the same period a year ago. 

Liquidity is expected to continue to rise this week as banks swap the remaining FCNR(B) inflows under the special facility while expectations that the RBI will introduce measures to drain durable liquidity, including incremental hikes in the cash reserve ratio or a market stabilisation scheme, are gaining traction, dealers said. Such a hike in the CRR would set the stage for a repo rate hike at the next policy meeting, some dealers said. Others said ensuring that the weighted average call money rate is near the repo rate need not signify the movement of interest rates.

GOVERNMENT BONDS

Gilt prices Wednesday are likely to track developments in West Asia and movement in Brent crude oil prices at the open, dealers said. Some traders expect the yield on the 10-year benchmark bond to rise above 7% in the next few months if the RBI raises repo rates, dealers said. In such a scenario, some traders expect the yield on the 10-year benchmark to rise to 7.20% in the current calendar year.

The yield on the 10-year benchmark 6.94%, 2036 bond is seen moving between 6.85% and 6.98%, dealers said. Any significant movement in the rupee and swap rates will also lend cues, they said.

The 10-year benchmark 6.94%, 2036 bond ended at INR 99.86 Tuesday, against INR 99.95 Monday. The yield on the bond rose to 6.9581% from 6.9452% at the end of the previous session. This was the highest closing level for the 10-year benchmark yield since Jun. 5, the day of the Reserve Bank of India's June monetary policy.

OIS RATES

On Wednesday, swap rates will track crude oil prices and US Treasury yields along with fresh developments in the US-Iran war, dealers said. On the domestic front, traders will watch the RBI's management of surplus liquidity in the banking system, they said.

The one-year swap rate continues to reflect around 100 basis points of repo rate hikes over the next 12 months, dealers said. The one-year swap rate is seen Wednesday in the range of 5.85-6.10% and the five-year at 6.40-6.65%. 

The one-year swap rate ended at 6.02%, from 6.00% Monday. The five-year swap rate ended at 6.51%, from 6.48% at the previous close. The five-year swap rate had hit a low of 6.47% and a high of 6.54% during the day. 

CALL

Wednesday, the one-day call rate is expected to open near the RBI's repo rate of 5.25% on early demand for funds from primary dealers, with banks having the option to deploy the cash at the day's variable rate reverse repo auction, dealers said. FCNR(B) inflows and government spending are likely to have further increased systemic liquidity, they said. 

The RBI will conduct an overnight VRRR auction for INR 5.00 trillion at 0930-1000 IST Wednesday. This is after a 15-day auction Monday and a seven-day tender Tuesday were poorly subscribed and followed by overnight VRRRs.

Dealers expect the one-day call rate at 4.60–5.25%. The tri-party repo rate is expected to be in the 4.50–5.20% band. The weighted average rate in the call market is seen in the 4.90–5.20% band and the tri-party repo rate is likely to be 4.75-5.10%, dealers said. The one-day call rate ended at 4.75% Tuesday, down from 5.25% at the open but the same as Monday's close for one-day loans. The one-day tri-party repo rate ended at 4.50%, from 5.00% at the open and 4.75% at Monday's close for one-day loans.

RBI AUCTION

--RBI to hold overnight VRRR auction for INR 5 tln 0930-1000 IST 

--RBI to auction INR 90 bln of 91-day T-bills 

--RBI to auction INR 70 bln of 364-day T-bills 

--RBI to auction INR 80 bln of 182-day T-bills 

LIQUIDITY

Total net outflows of INR 255.20 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 10.70 billion as coupon on state bonds Wednesday

* Outflows

--INR 265.90 billion as payment for state bonds Wednesday

End

US$1 = INR 94.95

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

Reported by Kabir Sharma

Edited by Rajeev Pai

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