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Informist, Friday, Apr. 25, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended slightly higher Friday as traders paid fixed rates on fears over tensions between India and Pakistan escalating to a military conflict, dealers said. Most short-term swap rates saw lower trade volumes than usual as there were no fresh interest rate cues, and volumes were concentrated in the five-year segment.

The one-year swap rate ended at 5.73%, against 5.71% Thursday. The five-year swap ended at 5.68%, against 5.66% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform fell to INR 255.5 billion, from INR 332.80 billion Thursday.

Traders paid fixed rates to protect their underlying gilt investments, with yields on both the five- and 10-year benchmark gilts rising by 4 basis points, dealers said. India's financial markets--rates, equities, and currency--were all sensitive to news from Jammu and Kashmir through the day. A terrorist attack in the Union territory earlier this week led to a flurry of diplomatic actions by the two neighbours.

Hindustan Times posted a video on X, formerly Twitter, saying the army "reacted strongly" after Pakistani troops opened fire at "multiple locations along the Line of Control" in Jammu and Kashmir. The Line of Control is the boundary agreed upon between the two countries in the former state under the Shimla Agreement, 1972. Pakistan said Thursday it would hold the treaty in abeyance, following India's move Wednesday to suspend the Indus Waters Treaty, 1960. Uncertain if the conflict would worsen over the weekend, traders paid fixed rates near the close of trade as well, dealers said.

"In times of crisis, traders will want to pay to offset risk," a dealer at primary dealership said. "Considering everyone is already positioned heavily on rate cuts, the market will go into a defensive mode, which we saw today: sell what gilts you have and hedge the rest."

The five-year swap rate was the most-traded, with notional traded volumes up nearly 50% from the previous day at INR 96.35 billion, in a wide range of 5.64-5.70%. The rate had opened steady but fell early in the day tracking an overnight fall in US Treasury yields. US yields continued to ease through Indian market hours on hopes of further rate cuts by the US Federal Reserve, and on comments by US administration officials that they are close to signing trade deals with key trading partners, including India, amid the threat of tariffs.

The 10-year US Treasury yield fell to 4.31% at 1700 IST from 4.37% at the close of the Indian market Thursday. Offshore traders initially received fixed rates, before a spurt of unwinding on news of escalating tensions. Most of this activity was concentrated in the two- and five-year swap rates, dealers said. The continued weakness in US yields ultimately capped the paying pressure in the five-year swap rate, and some domestic traders received fixed rates at the day's high of 5.70%, dealers said.

Volumes on the one-year swap were muted as traders were already pricing in 50 bps of further repo rate cuts by the Reserve Bank of India's Monetary Policy Committee in 2025, with most expecting these to come in the next two policy reviews in June and August. The current level of geopolitical tensions did not immediately make a case for repricing rate cuts, dealers said. 

"If you look at the one-year rate, it should stagnate the most because you are unlikely to hedge on it and rate- cut expectations are not going away in a war. There's no excitement there," a dealer at another primary dealership said. 

OUTLOOK

Swaps are not traded Saturday. On Monday, swap rates are likely to take cues from geopolitical developments between India and Pakistan over the weekend, dealers said. Traders will unwind their received fixed-rate bets if there are further instances of firing on the border or major military activity between the two countries, dealers said. However, if a diplomatic solution is found, traders may receive the two- and five-year swap rates aggressively, pulling them down by up to 5 bps each.

The movement in US Treasury yields may also lend direction to swap rates. The impact of the offshore trigger may be muted as traders are convinced domestic interest rates are going to fall further, particularly after the release this week of the minutes of the Monetary Policy Committee's April meeting, dealers said.

With no major data releases scheduled, traders will track the movement of the overnight Mumbai Interbank Offered Rate for direction on short-term swap rates. Swaps maturing in three years and above may be sensitive to developments in the US-China trade war and broader US tariff policy.

The one-year swap rate is seen in a range of 5.55-5.75%. The five-year contract is seen within 5.63-5.82%.

End

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

Edited by Rajeev Pai

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