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Informist, Monday, Oct. 5, 2026

 

MUMBAI – Gilt prices and swap rates are likely to take cues from movements in crude oil prices and US Treasury yields as well as developments relating to the war in West Asia at Tuesday's opening, dealers said. However, bond prices and swap rates are likely to remain steady in thin trade on caution ahead of the Reserve Bank of India's Monetary Policy Committee's rate decision Wednesday. The panel is widely expected to raise the repo rate by 25 basis points, dealers said. Though the rate hike may not lead to a sharp reaction, RBI Governor Sanjay Malhotra's comments and the central bank's policy stance and measures to drain liquidity will be closely watched, they said.

 

Traders widely expect the Reserve Bank of India's Monetary Policy Committee to begin a shallow rate-hike cycle in October with a 25 bp increase Wednesday, dealers said. They look ahead to the commentary of RBI officials after the rate decision, including Governor Malhotra's assessment of growth and inflation. 

 

On the other hand, the two-day call money rate is expected to hover near the RBI's repo rate of 5.25%, depending on demand for funds from banks and primary dealers, dealers said. Outflows due to excise duty are likely to keep call rates higher, dealers said. However, the remaining inflows from the foreign currency non-resident (banks) deposits are likely to cap the upside in rates, dealers said.

 

GILTS

Gilts are likely to open steady Tuesday on caution ahead of the Monetary Policy Committee's rate decision. Gilts are pricing in repo rate increases of around 100 bps from current levels and a convincing argument from central bank officials on a shallower rate-hike cycle despite high crude oil prices and US yields may lead to a sharp increase in bond prices, dealers said. Most traders expect a maximum rate hike cycle of only 50–75 bps by February, while others see higher inflation causing four repo rate increases.

 

"The MPC may also shift its stance from 'neutral' to 'calibrated tightening' or 'withdrawal of accommodation'," Goldman Sachs said in a note Friday. "With growth surprising above expectations, core inflation broadening and El Nino-related food inflation risks likely to intensify in 2027, we now expect a further 50bp of tightening in H1 2027 (25bp each in Q1 and Q2), taking cumulative hikes in this cycle to 100bp."

 

A major development in the war in West Asia and its impact on crude oil prices and US Treasury yields may also lend direction to gilt prices Tuesday, dealers said. However, gilts will have lower sensitivity to offshore triggers as they are not likely to influence the rate-setting panel's decision this week. Foreign portfolio investors are also expected to remain on the sidelines until the rate decision, 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 7.15% and 7.25%, dealers said.

 

Monday, the benchmark bond ended at INR 98.14, up slightly from INR 98.12 Thursday. Its yield fell to 7.2108% from 7.2133% at the end of the previous session. The financial markets were shut Friday for Gandhi Jayanti.

 

OIS

Tuesday, swap rates will take cues from movements in crude oil prices and US Treasury yields and developments in the war in West Asia, dealers said. Inflation readings are rising while growth indicators show resilience, strengthening the case for repo rate increases. A quarter-percentage-point rate hike is already factored into OIS rates and a lack of further policy tightening will lead to a fall in swap rates, they said.

 

For direction, traders will focus on comments by RBI Governor Malhotra after the policy decision Wednesday. They 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, dealers 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 5.95–6.35% and the five-year at 6.55–6.90%.

 

On Monday, the one-year swap rate ended at 6.26%, down from 6.27% Thursday, and the five-year swap rate closed at 6.69%, down from 6.73% at the previous session.

 

CALL

Tuesday, the two-day call money rate is expected to hover near the RBI's repo rate of 5.25%, depending on demand for funds from banks and primary dealers, dealers said. Outflows due to excise duty are likely to keep call rates higher, dealers said. However, the remaining inflows from the foreign currency non-resident deposits with banks are likely to cap the upside in rates, dealers said.

 

Government spending is also likely to infuse more liquidity into the banking system over the next few sessions, which may drag overnight money market rates lower, dealers said. Later in the month, goods and services tax collections will push rates up, dealers said. Moreover, some traders expect the central bank to continue variable rate reverse repo auctions to limit the downside in rates.

 

In the post-market hours Monday, the RBI announced an overnight VRRR auction for INR 2.50 trillion to be conducted from 0930 IST to 1000 IST. Reversal will take place Wednesday. No outflows are scheduled for Tuesday, against INR 2.91 trillion of inflows, including INR 2.10 trillion from the reversal of VRRR auctions. Dealers expect the one-day call rate to be at 5.10–5.25% Tuesday while the tri-party repo rate is seen at 5.15-5.25%.

 

The one-day call rate ended at 4.80% Monday, down from 5.10% at the open and same as the close for two-day loans Saturday.

 

RBI AUCTION

--RBI to hold overnight VRRR auction for INR 2.5 trillion 0930-1000 IST Tue 

--13 states to raise INR 251 billion via bond sale Tuesday 

 

LIQUIDITY

Total net inflows of INR 92.07 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 8.85 billion as coupon on state bond 

--INR 10.00 billion as redemption of state bond 

--INR 73.22 billion as coupon on 6.48%, 2035 bond

--INR 2.00 trillion on reversal of 1-day VRRR

--INR 101.42 billion on reversal of 1-day VRRR

 

* Outflows

--Nil

 

End

 

US$1 = INR 96.29

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

 

Reported by Janwee Prajapati

Edited by Rajeev Pai

 

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