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Informist, Thursday, Sept. 3, 2026

 

MUMBAI – Government bond prices and overnight indexed swap rates will track systemic liquidity data Friday. Dealers expect the Reserve Bank of India to announce measures to drain durable liquidity from the banking system. Most traders expect incremental hikes in the cash reserve ratio to take it to 4%, from the current 3%, which is historically low.

 

Raising the CRR to 4% over time would lock up about INR 2.75 trillion of systemic liquidity, dealers said. Outflows for advance tax and goods and services tax this month will drain about INR 5 trillion. By the RBI's next policy meeting in October, core systemic liquidity could top INR 10 trillion, they said. An increase in the CRR would also set the stage for a repo rate hike at the policy meeting to follow, some dealers said.

 

The RBI could announce a combination of measures Friday, or in a phased manner, including sale of government bonds through open market operations, a dollar-rupee sell-buy swap, or a market stabilisation scheme. Some traders also expect measures such as a long-term variable rate reverse repo auction with the option of premature redemption. 

 

GOVERNMENT BONDS

At Friday's opening, gilt prices may take cues from movements in US Treasury yields and crude oil prices. Thereafter, they are likely to take cues from the result of the INR 320-billion weekly auction at 1030-1130 IST. The government will sell INR 210 billion of a new five-year bond and INR 110 billion of the 7.71%, 2066 bond. Demand for the short-term gilt is expected to be robust for asset-liability management by banks. Long-term investors are likely to mop up the supply of the 40-year gilt, dealers said.

 

Until the window to swap FCNR(B) deposits shuts on Sept. 11, traders are unlikely to aggressively place short bets on gilts, they said. Traders are tracking the liquidity measures the RBI will take to prop up overnight money market rates as the banking system liquidity surplus has risen to a record, dealers said.

 

Given the growing expectations of a rate hike, some traders expect the central bank to announce measures to absorb excess liquidity from the banking system amid such a large surplus, dealers said. The surplus liquidity in the banking system is seen warranting measures to drain durable liquidity beyond the variable rate reverse repo operations the RBI has been conducting. Traders expect measures that could include incremental hikes in the cash reserve ratio or sales of government bonds through open market operations, dealers said.

 

Focus will also be on the US Federal Open Market Committee's rate decision mid-month, dealers said. The FOMC decision will be a key trigger for the RBI's Monetary Policy Committee to take a call on the repo rate in October, they said. Traders expect the yield on the 10-year benchmark bond to hit 7.10% in about a month. Towards the end of September, focus will also be on the Centre's and states' borrowing plan from the second half of the financial year 2026-27 (Apr-Mar), with supply from both expected to be heavy.

 

Any significant movement in the rupee and swap rates will also lend cues, dealers said. The yield on the 10-year benchmark 6.94%, 2036 bond is seen moving between 6.90% and 7.05%, they said. Thursday, the bond ended at INR 99.82 or 6.9646%.

 

OIS RATES

Friday, swap rates are seen opening lower as systemic liquidity is likely to rise further, with expectations of systemic liquidity hitting INR 12 trillion by the end of the week, dealers said. Traders will also track the movement of crude oil prices and US Treasury yields, besides any developments in the US-Iran war. The one-year swap rate is seen in the range of 5.82-6.10% and the five-year at 6.35-6.65%. The one-year swap rate ended at 6.00%, unchanged from Wednesday. The five-year swap rate ended at 6.49%, against 6.53% the previous day.

 

CALL

Friday, the three-day call rate is expected to open below the RBI's repo rate of 5.25% and near the SDF rate as liquidity surplus in the banking system is seen rising further overnight, dealers said. As has been seen the past week, the call money market rate is likely to open much later in the session, with primary dealers likely to resort to borrowing funds from the repo and tri-party repo markets. The RBI has said it will conduct a three-day VRRR for INR 7 trillion Friday, which is likely to see moderate subscription, dealers said.

 

Dealers expect the three-day call rate at 4.60–5.20% Friday. The three-day tri-party repo rate is expected to be in the 4.50–5.10?nd. The weighted average rate in the call market is seen in the 4.90–5.10?nd, and the tri-party repo rate is likely to be 4.50-5.00%, dealers said. The one-day tri-party repo rate ended at 3.75% Thursday, down from 4.79% at the open and 4.07% at Wednesday's close. 

 

RBI AUCTION

--RBI to hold three-day variable rate reverse repo auction for INR 7 trillion 0930-1000 IST  

--Govt to auction two gilts worth INR 320 billion

 

LIQUIDITY

Total net inflows of INR 41.02 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 41.02 billion as coupon on state bonds

--INR 5.19 trillion as redemption of first overnight VRRR auction

--INR 346.52 billion as redemption of second overnight VRRR auction

 

* Outflows

--Nil

 

End

 

US$1 = INR 94.48

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

 

Reported by Cassandra Carvalho

Edited by Rajeev Pai

 

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