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Informist, Monday, Jun. 2, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower Monday, tracking a fall in gilt yields near the end of trade in a choppy session, dealers said. The one-year swap rate ended at 5.56%, against 5.60% Friday. The five-year swap rate ended at 5.66%, against 5.68% the previous day.

Gilt yields fell as stop-losses were triggered towards the end of the trading session when the price on the 6.79%, 2034 gilt rose above INR 100.58, leading to traders covering short bets, dealers said. Swap rates tracked the fall in bond yields and traders unwound paid bets placed earlier, they said. Due to bond swaps and reverse bond swaps, traders with positions in the gilt market closely tracked bond yields in the OIS market, dealers said.

Swap rates had opened lower tracking a fall in gilt yields and a slight easing of US Treasury yields over the weekend, dealers said. However, later in the day, traders paid fixed rates after stronger-than-expected India GDP growth for Jan-Mar dashed hopes of rate cuts of more than 50 basis points in the remainder of 2025 by the Reserve Bank of India's Monetary Policy Committee, dealers said.

India's GDP growth for Jan-Mar released Friday was 7.4%, higher than most traders' estimates of 6.5%. An Informist poll had estimated the GDP growth at 6.8%. However, the annual estimate for the financial year 2024-25 (Apr-Mar) was unchanged at 6.5%, which was a positive cue for some traders.

Swap rates have currently priced in two more rate cuts of 25 bps each in 2025, including a cut expected at the outcome Friday of the rate-setting panel's meeting, dealers said. Some traders had expected a rate cut of 50 bps in the June policy, hopes of which faded after the strong growth print, leading to a rise in swap rates.

"Now, after GDP, I'm just expecting a 25 bps cut (Friday) and a shift from MIBOR (Mumbai Interbank Offered Rate) to SORR (Secured Overnight Rupee Rate)," a trader at a primary dealership said. "I think the latter half of the year (August onwards) can see some more liquidity measures, etc being announced." 

The intraday movement of the 10-year benchmark US Treasury note also lent cues to swap rates, dealers said. The yield on the 10-year note was 4.44% at 1700 IST, from 4.42% at 0900 IST and 4.43% at 1700 IST Friday. However, offshore flows were minimal and trade was largely by domestic traders, dealers said.

Trade volumes were low as traders played it safe ahead of the rate-setting panel's decision Friday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 208.15 billion, lower than INR 246.70 billion Friday.

While swaps have priced in a 25 bps cut at the outcome, traders hope for a "dovish" commentary by RBI Governor Sanjay Malhotra Friday--indications that the rate-setting panel had left the door open for further rate cuts. Traders expect the RBI to reduce its inflation estimate for the financial year 2025-26 (Apr-Mar) by 20-30 bps. At the rate-setting panel's meeting in April, Malhotra had said the RBI's inflation estimate for FY26 was 4.0%. Most dealers also expect the governor to announce measures to boost liquidity such as the widening of the liquidity adjustment facility corridor by 25 bps more on either side of the repo rate. Some dealers also expect a 25 bps cut in the cash reserve ratio. 

The volatile movement in swaps led to traders playing on spreads between tenures. "I think 2x5 (spread between the two-year swap rate and the five-year swap rate) has widened and the juice is mostly over there," a dealer at private-sector bank said. "Wherever there is an inversion in the curve, a spread trade is good. The 1x2 (spread between the one-year OIS and two-year OIS) is good to pay on two-year (OIS)."

OUTLOOK

Tuesday, swaps may take cues at the opening from the overnight movement of US Treasury yields after the release of economic data in the US and comments from US Federal Reserve officials. If the yield on the 10-year benchmark US Treasury note rises to the key 4.50% level, the five-year OIS rate could rise to 5.72%, after which traders are likely to receive fixed rates, dealers said. 

However, swap rates are expected to trade in a thin band until the outcome of the RBI's policy meeting, due Friday. Traders await Governor Malhotra's comments on growth, inflation, the rate-cut trajectory, and liquidity at the outcome.

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 seen at 5.59-5.72%.

End

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

Edited by Rajeev Pai

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