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Informist, Thursday, May 8, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates and trading volume surged on Thursday as military strikes between India and Pakistan increased, dealers said. This went against the view of most market participants, who expected tensions to ease after India's military strikes Wednesday. The one-, two- and five-year swap rates rose the most in a day since Jan. 13.

The government Thursday told an all-party meeting that Operation Sindoor, the codename for India's military strikes in Pakistan and Pakistan-occupied Kashmir early Wednesday, was still underway. In a press release, the government also said that Pakistan tried to engage military targets in northern and western India Wednesday night and that India was able to neutralise Pakistan's missiles and drone attacks. While the government release came only on Thursday afternoon, swap rates had begun climbing earlier in the day on news reports of drones being downed.

"There is a great deal of panic in the market, which we saw by the afternoon when the government confirmed that more fighting had taken place," a dealer at a primary dealership said. "People had gone heavy Wednesday, and now the sentiment is that even war could be coming, so everybody rushed to hedge."

On Wednesday, the one-year and five-year swap rates had closed at their lowest levels in nearly three years. On Thursday, swap rates opened slightly lower, continuing the momentum, with received bets being lucrative for offshore traders as non-deliverable OIS rates were lower by around 2 basis points than the onshore swap rates across the curve, dealers said.

The one-year swap rate ended at 5.67%, up from 5.60% Wednesday. The five-year swap ended at 5.68%, jumping up from 5.56% Wednesday. Total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 685.25 billion, more than double of INR 284.45 billion Wednesday.

Indian armed forces launched a military operation early Wednesday against nine sites in Pakistan and Pakistan-occupied Kashmir from where terrorists were suspected to be operating, the defence ministry had said. Dealers had expected that it would be the only military action between the two neighbours, a retaliatory strike for the Apr. 22 terrorist attack in Pahalgam that claimed the lives of 26 civilians. While ceasefire violations on the border had not changed market expectations, the news of continued two-way artillery and air force activities led to traders avoiding risk, dealers said.

Offshore traders, along with foreign banks, unwound their received fixed rate bets aggressively Thursday. Onshore traders also paid fixed rates to hedge their fixed income holdings, with the 10-year bond yield also rising the most in nearly four months Thursday. The five-year swap was the most traded contract, and its notional traded volume rose to the second-highest ever at INR 163.45 billion.

Some traders were also concerned that the border tensions and the fall in the rupee may deter rate cuts in India. The Indian rupee has fallen 1.5% since Tuesday as foreign investors have dumped Indian assets and traders hit stop-losses on their short dollar bets. However, others were more sanguine on the rate cut view and said short-term swaps would not reprice rate cuts until there was further escalation and military operations became more widespread.

"Till now I don't think there's a case for something (to change in) the rate cycle (view)," a dealer at a private sector bank said. "Maybe people have started pricing some uncertainty in June, but we'll have to wait and watch how the risk and conflict escalates. Until then, there's no change in rate view."

The three-month swap rate was heavily traded as its maturity coincides with the Monetary Policy Committee's meeting in August, while also capturing rate cut expectations in the upcoming June policy, dealers said. The swap rate was little changed at 5.84% Thursday even as notional volume spiked to the most since Jan. 16. OIS rates continued to reflect at least a 50-basis-point repo rate cut by the Reserve Bank of India's rate-setting panel in the rest of the calendar year, dealers said.

OUTLOOK

On Friday, swap rates will be driven by developments on the India-Pakistan front, dealers said. Traders are on the watch for any further escalation after the neighbours ramped up military activity on the border Wednesday and Thursday.

Caution because of border tensions may deter domestic traders from actively trading in swaps, but activity by offshore participants could spur movement in rates, dealers said. Traders will track the movement of the overnight Mumbai Interbank Offer Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.50-5.75% Friday. The five-year contract is also seen in the 5.50-5.75% range.

End

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

With inputs from Cassandra Carvalho

Edited by Nishant Maher

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