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Informist, Friday, May 30, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates surged after the release of India's GDP data as the March quarter growth beat estimates and led traders to trim their bets on rate cuts in the remainder of 2025, dealers said. Swap rates were lower before 1600 IST, when the data was released, due to a fall in US Treasury yields. 

The one-year swap rate ended at 5.60%, against 5.57% Thursday. The five-year swap rate ended at 5.68%, against 5.64% on Thursday. Both swaps ended 6 basis points higher than the lows hit earlier in the day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 246.70 billion, higher than INR 151.20 billion Thursday.

India's March quarter GDP growth was 7.4% on year, against 6.8% seen in an Informist poll and the market's expectation of a reading around 6.5%, dealers said. Some traders had been paying fixed rates earlier in the day on caution ahead of the GDP release at 1600 IST and also on the view that GDP growth could top 7.0%, a minority view. In the same release, the government said it retained its estimate for 2024-25 (Apr-Mar) GDP growth at 6.5%.

Traders held their bets on a 25-basis-point rate cut at the meeting of the Reserve Bank of India's Monetary Policy Committee next week, though some who had expected a 50-bps rate cut paid fixed rates, dealers said. Moreover, OIS rates still reflect a terminal repo rate of 5.50%, accounting for one rate cut after June, they said. However, instead of a rate cut in August, some traders now expect the MPC to only cut the repo rate in October or beyond, as the imperative to support growth has taken a back foot.

"OIS had a delayed reaction. People first cut their positions in g-sec (government securities) and then paid swaps," a dealer at a private sector bank said. "Fortunately, the market has not moved too much as only two rate cuts were fully priced in. The people who were expecting a terminal (repo) rate of 5.25% or lower would have been disappointed, they would have paid heavily." 

The one-year swap rate was the most-traded on Friday, with a bulk of the volumes coming in the last hour of trade following the GDP data. The trading range also widened to 5.54-5.60%. Volumes across swap tenures were muted earlier in the day due to a lack of cues on domestic interest rates ahead of the GDP figure, which had been anticipated for the past month. With inflation expected to be benign through the year, and missing the RBI's forecast and medium-term target of 4%, traders were of the view that robust growth would be the only impediment to a deep rate cut cycle, dealer said.

Traders said there was likely an error trade by a market participant in the three-year swap, and was unlikely to be reversed due to the small divergence in rates, dealers said. The three-year swap rate spiked to 5.65% for a single trade, when the previous traded rate was 5.56%. 

Earlier in the day, an overnight fall in US Treasury yields led to some traders receiving the five-year swap rate. Initial claims for unemployment benefits rose to 240,000 in the week ended May 24, up by 14,000 on week and beating expectations, data from the Labor Department showed Thursday. Following the poor employment data, which raised hopes of rate cuts by the US Federal Reserve later this year, the 10-year US Treasury yield eased to 4.43% at the end of Indian market hours, from 4.53% at 1700 IST Thursday.

"US yields have come down, but that only impacted our market marginally," a dealer at a foreign bank said. "We did not track it (the 10-year US yield) much when it was going up also. GDP is a much more important factor before the MPC next week."

OUTLOOK

Swap rates are not traded on Saturday. On Monday, traders are going to continue assessing India's rate-cut trajectory after India's GDP growth in the March quarter was higher than the market expected, dealers said.

Lower-than-target inflation should continue to lead to further repo rate cuts, though the extent or pace of such cuts may be lower than the market was pricing in, dealers said. The consensus view remains that the repo rate could be cut to at least 5.50% later in 2025 from the current 6.00%. Traders may avoid large bets later in the week as the RBI's three-day MPC meet begins Wednesday.

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% Friday. The five-year contract is seen at 5.53-5.78%.

End

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

Edited by Deepshikha Bhardwaj

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