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Informist, Saturday, Sept. 5, 2026

 

MUMBAI – Government bond prices are seen opening higher Monday after the Reserve Bank of India refrained from currently conducting permanent measures to drain surplus liquidity in the banking system, contrary to expectations. The central bank, post market hours Friday, said it would conduct a 30-day variable rate reverse repo operation with the option of premature reversal Monday. However, reception of the VRRR is mixed, with several dealers not expecting full subscription due to its long-tenure despite the option of premature reversal, they said. Mutual funds are also not allowed to participate in VRRRs, and currently sit on hefty cash and deploy it at extremely low rates. 

 

Moreover, the RBI's proactive management to drain surplus liquidity is also seen as a sign of imminent hikes in the repo rate, according to some market participants. Others believe that the 30-day VRRR sets the stage for permanent measures to drain liquidity surplus at the RBI's Monetary Policy Committee meeting outcome in October, which is the same date as the reversal of the 30-day VRRR. 

 

A rise in US Treasury yields could also weigh on bond prices, after stronger-than-expected non-farm payrolls data. US yields rose post-market hours Friday after US non-farm payrolls for August rose sharply higher than expected at 162,000 against 53,000 estimated in a Dow Jones poll. Focus will also be on the US Federal Open Market Committee's mid-month rate decision, dealers said. The FOMC decision will be a key trigger for the RBI MPC's repo rate decision in October, dealers said.

 

Gilts and swaps are not traded Saturdays.

 

GOVERNMENT BONDS

Monday, gilt prices are seen opening higher after the RBI refrained from hikes in the cash reserve ratio or sale of government bonds through open-market operations, contrary to market participants' expectations. Gilts may also take cues from movements in US Treasury yields and crude oil prices. Traders are refraining from aggressive short positions at least until the window to swap FCNR(B) deposits shuts on Sept. 11, dealers said. Traders expect the yield on the 10-year benchmark bond to hit 7.10% in about a month. As September nears its end, focus will also be on the Centre's and states' borrowing plans from October onwards, with heavy supply expected from both.

 

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 6.90% and 7.00% Monday, dealers said. Friday, the bond ended at INR 99.83, or 6.9625%.

 

OIS RATES

Swaps are seen falling Monday after the RBI refrained from conducting permanent measures to drain systemic liquidity and instead chose to conduct a 30-day variable rate reverse repo operation Monday with the option of premature redemption. Systemic liquidity is seen hitting INR 12 trillion by the end of this week, which is likely to support the fall in swaps, dealers said. 

 

Dealers had expected the RBI Friday to announce measures such as incremental hikes in the cash reserve ratio to drain durable liquidity in the banking system. However, traders will also track the movement in crude oil prices and US Treasury yields, along with any fresh 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% Monday. The one-year swap ended at 5.99%, while the five-year swap rate ended at 6.47% Friday.

 

CALL

Monday, the one-day call rate is seen near the RBI's Standing Deposit Facility amid hefty surplus liquidity. Borrowers are likely to prefer borrowing funds from the tri-party repo market, leading to poor volume in the call market. Liquidity could top INR 12 trillion over the weekend, dealers said. Excise duty outflows of about INR 400 billion are scheduled by Monday, dealers said, but is of little size compared to the large surplus liquidity in the system. Attention will be on participation in the RBI's 30-day VRRR, and whether the central bank conducts an overnight operation after it. Outflows for advance tax and goods and services tax payments later this month will drain about INR 5 trillion. By the RBI's next policy meeting in October—which is the same day as the reversal of the 30-day VRRR—core systemic liquidity could top INR 10 trillion, which could merit permanent measures to drain the liquidity surplus, dealers said. Dealers expect the one-day call rate at 4.00–5.20% Monday. The one-day tri-party repo rate is expected to be in the 3.50–5.15?nd. The two-day call rate ended at 3.25% Saturday.

 

RBI AUCTION

--RBI to hold 30-day variable rate reverse repo auction for INR 7 trillion 0930-1000 IST Monday 

 

LIQUIDITY

Total net inflows of INR 207.69 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 22.94 billion as coupon on state bonds Sunday

--INR 479.70 billion as redemption of 6.97%, 2026 gilt Sunday

--INR 16.72 billion as coupon on 6.97%, 2026 gilt Sunday

--INR 8.34 billion as coupon on state bonds Monday

--INR 5.42 trillion as reversal of 3-day variable rate reverse repo tender Monday

--INR 604.19 billion as reversal of second 3-day variable rate reverse repo tender Monday

 

* Outflows

--INR 320 billion as payment for gilts Monday 

 

End

 

US$1 = INR 94.4850

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

 

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

 

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