India IRS Review
Steady as local traders' unwinding offsets offshore flows
This story was originally published at 18:48 IST on 5 May 2025
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By Cassandra Carvalho
MUMBAI – Overnight indexed swap rates ended steady as a fall in swap rates due to offshore flows earlier in the day was offset by domestic traders unwinding received bets owing to caution over tensions between India and Pakistan, dealers said.
The one-year swap rate ended at 5.64%, almost unchanged from 5.63% on Friday. The five-year swap ended at 5.59%, unchanged from Friday. Total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 181.85 billion, down from INR 236.95 billion on Friday.
Swap rates opened lower despite a rise in US Treasury yields over the weekend. Offshore investors received fixed rates due to expectations that India will be better off than its emerging market peers on securing a trade deal with the US. The US is set to impose 26% reciprocal tariff on India in July. US President Donald Trump has indicated that the US is closest to striking bilateral trade deals with India, South Korea, and Japan.
Additionally, expectations of at least another 50 basis points of cuts in the repo rate by the Reserve Bank of India's Monetary Policy Committee in the remainder of 2025 have lured foreign investors to receive fixed rates in swaps, dealers said.
"Traders are playing on the arbitrage between the 5-year NDOIS (non-deliverable OIS, an instrument traded offshore) and OIS. NDOIS is at 5.57% so they are taking advantage of the spread (between NDOIS and onshore swaps)," a trader at a primary dealership said. When the 5-year non-deliverable OIS fell to 5.56% Monday, its onshore counterpart fell to 5.57% in early trade, its lowest since Jan. 17, 2022.
On the contrary, domestic traders felt swap rates have priced in too many rate cuts, and unwound some recieved bets at a profit, dealers said. Domestic traders were also cautious in placing any aggressive bets due to lack of clarity on tensions between India and Pakistan, dealers said. Domestic traders expect swap rates to be range-bound this week, but some expect the 5-year OIS to touch 5.55% in case of sustained foreign inflows.
Swap rates have "decoupled" from US Treasury yields, dealers said. The yield on the 10-year benchmark US Treasury note rose to 4.30% at 1700 IST from 4.23% at the same time on Friday. US Treasury yields rose Friday after US non-farm payroll numbers for April were higher than expected. Data released Friday showed the US labour market remained resilient amid President Trump's volatile trade policies. Non-farm payrolls rose by 177,000 in April, higher than a Dow Jones forecast of 133,000. The unemployment rate held steady at 4.2% in April.
On the global front, traders await the US Federal Open Market Committee's rate decision and policy guidance, due at 2330 IST Wednesday. As of 1700 IST, Fed fund futures priced in 97% chance of status quo in the federal funds rate, according to the CME FedWatch tool.
OUTLOOK
On Tuesday, swap rates are likely to open steady unless activity by offshore participants spurs a movement in rates, dealers said. Swap rates may 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 conflict between the two countries, 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 will fall to near 5.75% from 5.94% on Monday. 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 Tuesday. The five-year contract is also seen in the 5.55-5.75% range.
At 1700 IST | FRIDAY | |
1-year OIS | 5.64% | 5.63% |
2-year OIS | 5.50% | 5.49% |
5-year OIS | 5.59% | 5.59% |
2-year MIFOR | 6.00-6.12% | 6.00-6.12% |
5-year MIFOR | 6.18-6.30% | 6.17-6.29% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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