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Informist, Tuesday, Sept. 29, 2026

 

MUMBAI – Government bond prices and overnight indexed swap rates are likely to take cues from developments in the West Asia conflict and their impact on crude oil prices and US Treasury yields on Wednesday. Traders are expected to stay cautious ahead of the Reserve Bank of India's Monetary Policy Committee meeting Oct 5-7, dealers said.

 

As the US Federal Reserve hiked interest rates in September, the RBI's rate-setting panel is expected to follow with a 25-bps repo rate hike next week, dealers said. With inflation rising and growth indicators showing resilience, the case for a repo rate hike has strengthened, they said. A 25-bps hike is already priced into OIS rates.

 

Traders will also track the August US personal consumption expenditures report and the September jobs data. With yields on long-dated Treasuries at two-decade highs, the data could determine whether rates rise further. Any increase in US yields would also impact domestic bond yields and swap rates, dealers said.

 

Traders expect the RBI to announce an open market operation to sell bonds to absorb liquidity from the banking system. The announcement is likely towards the end of this week, ahead of the MPC meeting next week, which is expected to keep traders cautious, dealers said.

 

Wednesday, the one-day call money rate is expected to open near the RBI's repo rate of 5.25% due to early demand for funds from banks, dealers said. The large liquidity surplus in the banking system and inflows from the government's month-end spending may cap overnight rates.

 

GOVERNMENT BONDS

On Wednesday, bond prices may take cues from developments in the war in West Asia and their impact on crude oil prices and US Treasury yields. Any escalation in the war will significantly impact bond prices, dealers said. Traders are expected to stay on the sidelines ahead of the RBI's Oct. 5-7 meeting, dealers said. Some traders are likely to make space in their portfolios for the fresh supply of gilts at Thursday's weekly gilt auction. Money markets will be shut on Friday for Gandhi Jayanti.

 

Traders will also track the release of the August US personal consumption expenditures report and the September jobs report. With yields on long-dated Treasury notes and bonds at levels not seen in two decades, the economic data could determine whether rates rise even further. Any rise in US yields will also affect yields on domestic bonds, dealers said. Traders anticipate the RBI will announce an open market operation to sell bonds to absorb liquidity from the banking system. Such an announcement is expected towards the end of this week, ahead of the RBI's MPC meeting next week, which will keep traders cautious, dealers said. 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 expected to move between 7.10% and 7.25%, dealers said.

 

On Tuesday, the benchmark bond ended at INR 98.46, up from INR 98.31 Monday. Its yield fell to 7.1628% from 7.1848% at the end of the previous session. 

 

OIS RATES

On Wednesday, swap rates will take cues from movements in crude oil prices and US Treasury yields at the open and developments in the war in West Asia, dealers said. The next significant domestic rate trigger is the MPC's rate decision next week, they said. 

 

As the US Federal Reserve hiked interest rates in September, the RBI's rate-setting panel is expected to follow suit with a 25-bps repo rate hike next week, dealers said. Inflation readings are rising, while growth indicators show resilience, strengthening the case for repo rate increases, they said. A 25-bps rate increase is already factored into OIS rates.

 

For direction, traders will focus on comments by RBI Governor Sanjay Malhotra after the policy decision. Traders expect the central bank to introduce more measures to drain systemic liquidity, beyond the government bond sales it conducted this month and variable rate reverse repo operations, they said. Some expect more open-market operations sales of up to INR 1 trillion in October, while others expect a hike in banks' cash reserve ratio. The one-year swap rate is seen in the range of 5.95–6.32% and the five-year at 6.40–6.85%.

 

On Tuesday, the one-year swap rate ended at 6.19%, down from 6.24% Monday, and the five-year swap rate closed at 6.65%, down from 6.72% in the previous session.

 

CALL

On Wednesday, the one-day call money rate is expected to open near the RBI's repo rate of 5.25% due to early demand for funds, dealers said. The large liquidity surplus in the banking system and inflows from the government's month-end spending may cap overnight rates.

 

"We are expecting more inflows by the end of the month and start of next month," a dealer at a state-owned bank said. "Government spending is not fully in yet. That will lead to a further increase in liquidity." 

 

The RBI will conduct an overnight VRRR auction of INR 2.00 trillion at 0930-1000 IST Wednesday. Traders do not expect large subscription at the auction because of banks' month-end and quarter-end funding needs, dealers said. Dealers expect the one-day call rate to be at 4.50–5.40% Wednesday, while the one-day tri-party repo rate is seen at 4.50-5.30%. The one-day call rate ended at 5.15% Tuesday, up from 5.05% at the open and 4.99% Monday.

 

RBI AUCTION

--RBI to auction 91-day T-bills worth INR 90 billion 

--RBI to auction 182-day T-bills worth INR 80 billion 

--RBI to auction 364-day T-bills worth INR 70 billion

--RBI to hold overnight VRRR auction for INR 2 trillion 

 

LIQUIDITY

Total net outflows of INR 118.53 billion. The calculation does not account for redemptions of the Standing Deposit Facility and scheduled variable rate repo and variable rate reverse repo operations.

 

* Inflows

--INR 43.31 billion as coupon on state bonds

--INR 30.16 billion as coupon on 9.20%, 2030 bond

--INR 1.19 trillion as reversal of overnight variable rate reverse repo

--INR 338 billion as reversal of overnight variable rate reverse repo

 

* Outflows

--INR 192.00 billion as payment for state bonds

End

 

Reported by Janwee Prajapati

Edited by Saji George Titus

 

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