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Informist, Monday, May 26, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady owing to a lack of fresh cues on interest rates. The five-year swap rate traded in a wide range, impacted by the movement in government bond yields after the Reserve Bank of India announced its surplus transfer for the financial year 2024-25 (Apr-Mar) to the government, dealers said.

The one-year swap rate ended at 5.53%, flat against Friday's close. The five-year swap also ended flat at 5.63%. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 253.50 billion, higher than INR 205.50 billion Friday.

The yield on the 10-year benchmark gilt rose 3 basis points in early trade after the RBI's surplus transfer to the government, at INR 2.69 trillion, was closer to the lower end of traders' estimates of INR 2.50 trillion to INR 3.50 trillion. Traders paid fixed rates in the five-year swap rate tracking the rise in gilt yields, which quickly reversed course on bets on further rate cuts in 2025. They retained their bets of rate cuts of at least 50 bps more in 2025 by the RBI's Monetary Policy Committee from the current repo rate of 6.00%, including a 25-basis-point cut at the upcoming June policy meeting, dealers said.

"Activity from offshore was very limited today, which was to be expected," a dealer at a foreign bank said. "Not much to say on OIS actually since there was no strong movement. Most of it was domestic players, even in the morning when a lot of private banks paid after the dividend."

The one- and two-year swap rates were reflecting a further moderation to a terminal repo rate of 5.25%, dealers said. However, the five-year swap rate had traded in a narrow band over the past two weeks and was unable to price in further rate cuts due to the 10-year US Treasury yield remaining above 4.50%. The five-year swap was the most traded, having a volume four times that of the next-highest-traded contract, despite the lack of activity from offshore traders. US Treasuries were not traded Monday as the US market is shut for Memorial Day.

"I would prefer to receive in the OIS now, since it has been stagnant for the last few weeks," a dealer at a private bank said. "The only risk is, you need to have an appetite to deal with the whiplash from US yields going up. They are seesawing now, but we are not out of the woods yet."

The yield on the 10-year US Treasury note hit 4.63% Thursday, an over-three-month high, due to US fiscal concerns. Some traders fear the benchmark US yield could rise to 4.80% soon as a spending bill backed by US President Donald Trump makes its way through Congress. The bill is expected to widen the fiscal deficit in the world's largest economy. Traders were also cautious in placing large bets ahead of the US and India GDP prints, scheduled for Thursday and Friday, respectively. The minutes of the US Federal Open Market Committee's May rate decision and the reading of the Federal Reserve's preferred inflation gauge are also scheduled this week.

OUTLOOK

On Tuesday, rates are likely to track the movement of US Treasury yields in early Asian trade after a long weekend. A slew of US data later this week and the US FOMC minutes Wednesday may lead to reduced activity in the Indian OIS market by offshore investors this week, dealers said.

Traders also await the release of India's GDP data for Jan-Mar and FY25 Friday. According to an Informist poll of 19 economists, India's GDP growth is seen rising to a four-quarter high of 6.8% in Jan-Mar from 6.2% in the previous quarter. Traders are expecting a print of around 6.5% or lower for the March quarter, which would lend weight to the view that the terminal repo rate could fall to as low as 5.25%. However, if GDP growth in Jan-Mar is above 6.50%, traders said further repo rate cuts of more than 50 bps would be unlikely.

Traders will also track the movement of the overnight Mumbai Interbank Offered Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.48-5.70% Tuesday. The five-year contract is also seen in the 5.53-5.78% range.

End

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

Edited by Rajeev Pai

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