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Informist, Monday, Aug. 18, 2025

 

By Cassandra Carvalho

 

MUMBAI – Overnight indexed swap rates ended higher, tracking a rise in US Treasury yields and as domestic traders unwound bets of a rate cut by the Reserve Bank of India's Monetary Policy Committee in October or December due to expectations of stronger GDP growth after Prime Minister Narendra Modi's comments on goods and services tax rate rationalisation, dealers said. 

 

The one-year swap rate ended at 5.54%, against 5.51% Thursday. The five-year swap rate ended at 5.73%, against 5.67% Thursday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform fell to INR 243.05 billion from INR 341.95 billion in the previous session. Indian financial markets were shut Friday and swaps are not traded Saturdays. The yield on the benchmark 10-year US Treasury note was 4.30% at 1700 IST, against 4.24% at the same time Thursday. 

 

Modi said the government was reviewing the indirect tax regime and next-generation reforms would be brought in by Diwali. He said tax on regular-use items would be brought down significantly, which would help lower prices of such goods and also help domestic micro, small, and medium enterprises. The Centre has proposed continuing with the 5% and the 18% tax slabs under the goods and services tax in its recommendations to the rate rationalisation panel constituted by the GST Council, and doing away with the 12% and 28% tax slabs, a senior government source said later Friday. 

 

"I don't think another rate cut is coming now, we need to prepare for a long pause," a dealer at a private sector bank said. "It doesn't look like the RBI will have to do anything, now that the government has also joined the party to support growth." Swaps were earlier slightly pricing in a 25-basis-point rate cut at the MPC's October or December meeting due to GDP growth undershooting the central bank's forecasts amid tariffs on India by the US. Onshore traders paid fixed rate contracts, also to hedge their sales in the government bond market. A large corporate entity and mutual funds were paying fixed rate contracts, dealers said. Traders speculated that foreign portfolio investors were also paying fixed rates. However, volumes were thin and traders preferred hedging their gilt trades by placing short bets on the benchmark 10-year 6.33%, 2035 gilt, rather than exiting their positions in swaps, they said. 

 

"That receive impulse that was there in OIS so far was only because of offshore and that has died out," a dealer at another private sector bank said. The gains were capped as traders did not want to reduce their rate cut bets in swaps unless the reforms were confirmed and implemented, dealers said.  

 

US Treasury yields rose Friday as US data showed retail sales recorded strong gains in July. Higher-than-expected wholesale price inflation data reduced traders' expectations of a rate cut at the US Federal Open Market Committee's September meeting. Traders will focus on US Federal Reserve Chair Jerome Powell's comments at the Jackson Hole Symposium later in the week for any indication of a rate cut by the US FOMC in September in light of the recent US economic data. Fed fund futures are now showing a 15% chance of a status quo on rates by the US FOMC in September, up from 11% a week ago, according to the CME's FedWatch tool. 

 

OUTLOOK
On Tuesday, swap rates may take cues from the movement in US Treasury yields. Traders will watch out for US Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Symposium later in the week, for any indication of a rate cut by the US Federal Open Market Committee in September. On the geopolitical front, traders will track the outcome of a meeting between US President Donald Trump and Ukraine President Volodymyr Zelenskyy, dealers said.

 

On the policy front, while the tax reforms are seen reducing inflation, the Reserve Bank of India's Monetary Policy Committee is only likely to cut rates if growth takes a hit, and has dismissed inflation being below forecast, dealers said. The GST reforms are seen improving GDP growth, dealers said. Traders now see CPI inflation falling below the RBI's forecast for FY26 by 30-50 basis points. 

 

Traders await any update on the proposed tax reforms, especially if states approve of the move. Near-term swap rates will track the movement of the overnight Mumbai Interbank Outright Rate. Traders will also track minutes of the MPC's August meeting, due Wednesday, as some traders had expected at least one of the external members of the panel to vote for a rate cut, as opposed to the unanimous voting pattern which occured. 

 

The one-year swap rate is seen in the range of 5.48-5.56% Tuesday. The five-year contract is seen at 5.68-5.78%.

 

	At 1700 IST	THURSDAY
1-year OIS	5.54%	5.51%
2-year OIS	5.50%	5.45%
5-year OIS	5.73%	5.67%
2-year MIFOR	5.97%	5.90%
5-year MIFOR	6.21%	6.14%

 

End

 

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

 

Edited by Avishek Dutta

 

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