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Informist, Wednesday, Apr. 30, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates fell on Wednesday, with longer-term contracts more sensitive to the sharp fall in US Treasury yields, dealers said. There was no significant breakout as dealers said positives on domestic interest rate cuts were already factored into the benchmark rates. Two-way trade pushed up volumes, as the receiving pressure was met by traders paying fixed rates to hedge geopolitical risk ahead of the market holiday.

The one-year swap rate ended at 5.65%, against 5.67% Tuesday. The five-year swap ended at 5.62%, against 5.65% the previous day. Total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 354.63 billion, against INR 314.05 billion on Tuesday. Indian financial markets are shut Thursday for Maharashtra Day.

Swap rates fell early in the trade due to a sharp overnight fall in US yields on bets of the US Federal Open Market Committee cutting policy rates starting with its June meeting. US consumer confidence index fell to a five-year low in April and the US job openings and labor turnover survey for March showed that job openings were also slightly down. The yield on the 10-year US Treasury note fell to 4.17% in Asian market hours, and was at that level when the Indian market closed. The benchmark US yield was at 4.24% at 1700 IST on Tuesday.

The five-year swap was the most traded contract, with notional volumes worth INR 80.95 billion. It traded at or below its previous close through the day, at 5.61-5.65%.

At the day's low, some traders paid fixed rates across tenures to hedge their underlying government bond holdings as yields rose ahead of the INR 360 billion gilt auction Friday. Tensions between India and Pakistan were also closely monitored as the two nuclear neighbours have exchanged fire on the shared border in Jammu and Kashmir for five straight days. Traders were concerned of tensions flaring up on the market holiday, and their paying swaps prevented a sharp fall in the five-year OIS rate until the close, dealers said.

"You could only track the impact of the US yields through the volumes today (Wednesday), not really the rates," a dealer at a primary dealership said. "It was only during the end that rates got hit, there was a lot of inflow from offshore right at the close."

Meanwhile, the nine-month swap rate fell the most on Wednesday, though trades in the contract were minimal. Notional trade volumes were only a little over INR 5 billion until the last five minutes of trade, before a large trade more than doubled it. Dealers said this was likely traders taking a view that the Reserve Bank of India would frontload rate cuts, especially after two external members on the panel – Saugata Bhattacharya and Nagesh Kumar – have said in interviews this week that there was room to cut rates further.

Swap rates have readjusted lower this month after the RBI's Monetary Policy Committee cut the policy rate by 25 basis points to 6.00% and changed its stance to 'accommodative' from 'neutral'. Traders are pricing in at least a further 50 bps of repo rate cuts in 2025 through swap rates. Comments in the minutes of the meeting, released last week, also showed the focus of the members of supporting growth at a time when risks to the economy from US tariffs were high and there was reasonable certainty on inflation remaining anchored to the RBI's 4% target in 2025-26 (Apr-Mar).

"The rally is over, and people who have made money are already out," a dealer at a private bank said. "Now, you are playing for more granular gains – maybe 10 basis points max – on the one- and two-year rates." The one-year swap rate has fallen nearly 40 bps in April, while the two-year rate is down around 35 bps.

OUTLOOK

Financial markets are shut on Thursday for Maharashtra Day. On Friday, swap rates are likely to take cues from geopolitical developments between India and Pakistan, dealers said. Traders will unwind their received fixed-rate bets if there is major military activity between the two countries, dealers said.

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 last week of the minutes of the Monetary Policy Committee's April meeting, dealers said.

Traders will track the movement of the overnight Mumbai Interbank Offer Rate for direction on short-term swap rates, with the expectation it would fall to 5.75% from 5.93% on Tuesday. Swaps maturing in three years and above may be sensitive to developments in the US-China trade war and the broader US tariff policy.

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

End

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

Edited by Ashish Shirke

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