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Informist, Wednesday, May 28, 2025

By Srijita Bose

MUMBAI – The five-year overnight indexed swap rate ended flat for the fourth consecutive session on Wednesday as traders waited for fresh triggers during the week, dealers said. The one-year swap ended slightly higher Wednesday owing to thin volumes and as domestic traders chose to pay fixed rate on the swap, they said. Trade volumes were muted since swaps have already priced in more than 50 basis points of cut in the repo rate by the Reserve Bank of India's Monetary Policy Committee by the end of 2025, they said.

The one-year swap rate ended at 5.56%, slightly higher than 5.54% on Tuesday. The five-year swap rate ended flat against Tuesday at 5.63%. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 95.70 billion, sharply lower than INR 273.25 billion Tuesday.

"Trade volumes were very poor today (Wednesday) because people are just waiting for more triggers with events lined up for both US and India," a dealer at a primary dealership said. 

Offshore traders kept to the sidelines ahead of minutes of the US Federal Open Market Committee's May meeting, scheduled after Indian market hours on Wednesday. Traders were also cautious in placing large bets in the five-year swap ahead of GDP prints for the US and India. The reading of the Federal Reserve's preferred inflation gauge is also scheduled this week.

However, some offshore traders likely paid fixed rates on the two-year swap while buying government bonds of similar maturity, dealers said. The two-year swap ended at 5.46%, slightly higher than 5.44% on Tuesday.

The one-year swap was not traded through most of the day, with only two trades made during the day in the last half an hour of trade. Dealers said two more rate cuts of 25 bps each were already priced in for the remainder of 2025, with some expecting a third rate cut which could bring the RBI's repo rate to 5.25%. Majority of traders are factoring in a terminal repo rate of 5.50%, and waited for further triggers to increase their bets on rate cuts, dealers said.

India's GDP data for Jan-Mar and 2024-25 (Apr-Mar) is scheduled for release on Friday. This will be a significant cue to gauge 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 further increase views of 75 bps of further rate cuts in 2025, they said.

With comfortable liquidity in the banking system, domestic traders chose to buy government bonds and refrained from trading in swaps, especially with more than two rate cuts already priced in, dealers said. On Tuesday, the RBI had net absorbed INR 1.89 trillion from the banking system, higher than INR 1.70 trillion Monday, central bank data showed.

"I am not trading on OIS right now because it's better at this point to invest more in gilts instead," a dealer at a private sector bank said. "The spread with the five-year gilt is still good, but I will wait for Friday GDP number to take a call on reverse bond swaps." The yield spread of the five-year benchmark gilt over the five-year swap has narrowed to over 20 bps from nearly 50 bps at the beginning of the month. 

OUTLOOK

On Thursday, rates are likely to track the overnight movement of US Treasury yields. A slew of US data later this week and the US FOMC's minutes on 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% the previous quarter. Traders expect 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% Thursday. The five-year contract is seen at 5.53-5.78%.

End

Edited by Avishek Dutta

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