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Informist, Tuesday, May 27, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady due to a lack of fresh domestic cues on interest rates. An overnight fall in US Treasury yields failed to reflect in swap rates due to a lack of activity from offshore traders ahead of a news-heavy week, dealers said. 

The one-year swap rate ended at 5.54%, against 5.53% on Monday. The five-year swap rate ended at 5.63% for the third straight session. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 273.25 billion, slightly higher than INR 253.50 billion Monday.

Short-term swap rates saw the bulk of the traded volume, with volumes exceeding INR 50 billion in both the one- and two-year swaps. The one-year swap rate was the most traded, though in a narrow band of 5.54-5.56%. Dealers said further rate cuts of 25 basis points each were already priced in for the remainder of 2025, with a high chance of a third rate cut to 5.25% repo rate also reflecting in the short-term swap rates. Traders were likely adjusting their positions, with the majority of domestic traders only factoring in a terminal repo rate of only 5.50%, dealers said.

"The market is pricing in 50 bps easily, and there is no momentum of flows coming from offshore, so people are getting a bit itchy to either book profit and then re-enter," a dealer at a primary dealership said.

Offshore traders kept to the sidelines ahead of the US Federal Open Market Committee's minutes for its May meeting, scheduled after Indian market hours on Wednesday. Some traders said the views would be dated, as the commentary would not factor in the drawdown in trade tensions between the US and China – the world's two largest economies – after the meeting outcome on May 7.

Traders were also cautious in placing large bets in the five-year ahead of the US and India GDP prints. The reading of the Federal Reserve's preferred inflation gauge is also scheduled this week. Traders said the fall in the 10-year US Treasury yield to 4.47% from 4.51% at the end of Indian market hours on Monday had not triggered receiving from either foreign banks or offshore traders due to upcoming events.

"There is a lot of domestic and US data also this week, which is why I guess swaps are not moving too much," a dealer at a private bank said. "I think the market needs a trigger to actually break these levels now on the downside, otherwise we could be stuck here till GDP."

India's GDP data for Jan-Mar and 2024-25 (Apr-Mar) is scheduled for release on Friday. This is going to be a significant cue for gauging the trajectory of domestic interest rates going ahead, dealers said, especially since the opinion on the terminal repo rate was split, dealers said. A reading below 6.50% for the March quarter could cement views of 75 bps of further rate cuts in 2025, they said.

OUTLOOK

On Wednesday, rates are likely to track the overnight movement of US Treasury yields. 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 traders 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% Wednesday. The five-year contract is 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 Deepshikha Bhardwaj

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