India’s money market outlook predicts a decline in gilts on Monday due to heavy state borrowing.

On Monday, there is an expected decline in government bond prices due to heavy state borrowing of INR 5.00 trillion set for the March quarter, marking the highest borrowing by states in a single quarter. This substantial borrowing announcement is likely to signal a sharp opening lower for government bond prices. Additionally, the movement of overnight indexed swap rates is expected to align with the fluctuations in bond yields. Trade volumes are predicted to pick up next week as several foreign banks and offshore traders resume activities after the New Year holiday break.

The rupee’s early performance against the dollar will play a role in influencing bond prices, as will the movement in US Treasury yields and crude oil prices. Following US President Donald Trump’s announcement of a significant strike on Venezuela, including the capture of President Nicolas Maduro and his wife, crude oil prices are anticipated to rise. Furthermore, the release of the government’s initial GDP estimate for the 2025-26 financial year is expected to provide insights into interest rate trends next week. The progress of India-US trade negotiations may also impact bond prices.

The government bond and overnight indexed swap (OIS) markets will remain closed on Saturdays. The one-day call money rate on Monday may open near the Reserve Bank of India’s repo rate due to early demand for funds, particularly from primary dealerships. Liquidity is expected to stay tight until a substantial portion of inflows from the Centre’s spending is completed. Depending on the magnitude of inflows from the Centre’s month-end expenses and the central bank’s variable rate repo auction on Monday, rates may fall below the repo rate later in the day.

Government gilt prices are projected to decline on Monday following the announcement that states are aiming to raise INR 5 trillion through bonds in the January-March period. This figure is at the upper end of expectations among traders. Traders anticipate the 10-year benchmark yield to open approximately 5 basis points higher, nearing 6.70%, the highest yield recorded so far in the current financial year ending in March. The sale of INR 301 billion in bonds by nine states on Tuesday, predominantly maturing in 10-20 years, could further exert downward pressure on government bond prices.

In summary, the bond market is poised for notable movements in response to heavy state borrowing, external economic factors, US geopolitical developments, and upcoming economic indicators. Watch for potential shifts in bond yields, swap rates, and market liquidity as various events unfold in the coming week.