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Informist, Friday, May 2, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower on Friday as offshore traders received fixed rates, ramping up their exposure to India on the view further rate cuts were coming. Dealers said a lack of flare-up in border tensions over the past few days, including the market holiday Thursday, led domestic traders to pay less aggressively.

The one-year swap rate ended at 5.63%, against 5.65% Wednesday. The five-year swap ended at 5.59%, against 5.62% the previous trading day. Financial markets were shut on Thursday for Maharashtra Day. Total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 236.95 billion, down from INR 354.63 billion on Wednesday.

"Most of the activity was based on either flows or foreign banks," a dealer at a private bank said. "There has been position cutting across some segments and these were coming back. It is difficult to gauge what the next political or military move might be, but as of now it doesn't seem like any knee-jerk activity will take place."

Offshore traders were doubling down on their rate cut bets in India after sizing down some trades and booking profit. While a terminal repo rate of 5.50% is already priced into swap rates across tenures, including a 25-basis-point cut in June, some sections of the market have a view that the policy rate may fall to as low as 5.00% before March. Offshore dealers were receiving fixed rates in India as rate cut bets in the US also intensified, dealers said. A preliminary reading of Jan-Mar US GDP growth showed a contraction by 0.3%, the first negative reading since 2022.

The five-year swap contract was the most-traded for the day. It traded in a 5.58-5.63% band. Traders said this was a reflection of the presence of offshore traders. "The guy sitting in Singapore is moving from India to South-east Asia and then back to India cyclically," a dealer at a primary dealership said. "Onshore OIS can do nothing but react."

Meanwhile, notional trade volumes in the two-month contract jumped to INR 39.35 billion, the most in over a month, as an investor likely received fixed rates to offset a prior paid position in a short-term swap rate, dealers said. Domestic traders expressed an unwillingess to receive fixed rates further except for intraday trade as they said steeper rate cuts were not a given, especially with India likely to gain from the shift in the global value chain. US administration officials have repeatedly said India may be the first country to sign a trade , amid the threat of higher tariffs on most key trading partners. 

OUTLOOK

Swaps are not traded on Saturday. On Monday, 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 a 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 near 5.75% from 5.95% on Friday. 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 Monday. The five-year contract is also seen in the 5.55-5.75% range.

End

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

Edited by Akul Nishant Akhoury

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