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Informist, Wednesday, May 14, 2025

By Aaryan Khanna

NEW DELHI – Most overnight indexed swap rates ended little changed on Wednesday due to lack of fresh triggers on interest rate, though traders continued to bet on further rate cuts. Some offshore traders paid the five-year swap early in the day, while domestic traders received swaps maturing in under one year more aggressively, dealers said.

The one-year swap rate ended at 5.63%, against 5.64% Tuesday. The five-year swap ended at 5.66%, from 5.65% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 417.50 billion, lower than INR 623.30 billion Tuesday.

Swap rates maturing between one and six months fell 3-7 basis points on Wednesday, adjusting for a fall in rates in longer tenures Tuesday amid risks on the geopolitical front easing. India and Pakistan agreed to a full ceasefire over the long weekend, while the US and China agreed to a deal to mutually bring down tariffs. Furthermore, CPI and wholesale price inflation for April both printed in line with estimates and made the case for a policy repo rate cut in June, dealers said. CPI inflation fell to a near six-year-low of 3.16% in April, while WPI inflation printed at 0.85% in April, the lowest reading in 13 months. 

"Most of the domestic market was concerned with the sub-1 year points (Wednesday), which had not moved too much (earlier) because there is very little money to be made there. All the traders have been in 1-, 2- and 5-year (swaps)," a dealer at a primary dealership. "As you can see, the one-year rate was hardly traded today." The notional traded volume on the one-year contract fell to INR 21.85 billion Wednesday against INR 119.20 billion Tuesday.

Traders said one-month swap rate was still not fully pricing in even a 25-bps rate cut at the next policy review in June, now less than a month away, as overnight rates had remained higher than the market expected, even though it was lower than the repo rate. The overnight Mumbai Interbank Offered Rate--the floating leg of the OIS contract--has been set at 5.90% for over a week. After the Reserve Bank of India's efforts to infuse liquidity into the banking system, including through large bond purchases under open market operations, some dealers had expected the MIBOR rate to be closer to the standing deposit facility rate of 5.75%.

Regardless, the RBI's Monetary Policy Committee is expected to cut rates at least twice more in 2025 to 5.50%. These rate cuts were priced into the most-traded rates, which on Wednesday was the two-year swap. The contract traded in a range of 5.50-5.54% on Wednesday and ended at 5.51%. Most of the paying pressure occurred early in the day and was concentrated in the two- and five-year swaps, dealers said.

"Offshore guys are the primary culprit today, which is mostly due to flows," a dealer at a foreign bank said. "We are getting hit by model funds unwinding their positions in OIS, as the market may be running out of juice for some of the funds." Model funds track a variety of asset classes and make bulk purchases to sell to individual investors. They are designed to achieve an expected return with a corresponding risk.

OUTLOOK

On Thursday, swap rates will likely track the overnight movement in US Treasury yields, dealers said. Traders also await the RBI's payment of its annual dividend to the central government, due this month. Traders estimate the dividend to be around INR 3 trillion, which will add durable liquidity to the banking system. If in line with or above the estimates, the dividend transfer could pull swap rates down, dealers said.

Traders will also track the movement of 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% Thursday. 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

Edited by Akul Nishant Akhoury

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