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Informist, Tuesday, Jun. 3, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended slightly lower Tuesday as traders prepared for overnight rates to fall on Friday. Traders avoided aggressive bets on caution ahead of the Reserve Bank of India's Monetary Policy Committee's three-day meeting starting Wednesday, where the rate-setting panel is widely expected to cut the repo rate by at least 25 basis points from the current 6.00%, dealers said.

The one-year swap rate ended at 5.55%, against 5.56% on Monday. The five-year swap rate ended at 5.64%, compared to 5.66% on Monday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 281.45 billion, higher than INR 208.15 billion Monday.

Short-term swap rates reflected a terminal repo rate of 5.50%, only reflecting a slight chance of further rate cuts beyond that after India's GDP growth was higher than expected in Jan-Mar, dealers said. Swaps inched lower Tuesday taking into account the overnight Mumbai Interbank Offered Rate – the fixed leg of the OIS contract – would fall by 20-25 bps after the repo rate cut expected Friday.

Notably, the nine-month swap saw the largest amount traded at INR 45.95 billion, dealers said. This was the highest single-day trade in the the contract on the platform since Feb. 11. Activity in the one- and two-month swap rates is also likely to pick up before Friday, as pricing gets updated to reflect the expected fall in the MIBOR, dealers said.

"The (MIBOR) fixing-related adjustments are happening, it seems, before the policy," a dealer at a private bank said. "There is also chatter that the SDF could be lowered by 50 bps, or that the MPC could do a full 50 bps rate cut, and that some are also saying that more OMOs (open market operations to buy gilts) could come." The RBI has bought over INR 5 trillion worth of gilts so far in 2025, injecting liquidity into the banking system and bringing down overnight rates.

A section of the market expects the RBI to widen its Liquidity Adjustment Facility corridor asymmetrically, bringing the standing deposit facility rate at 50 bps below the policy repo rate from the current spread of 25 bps. This would be akin to a 50-bps cut in the policy rate, as the overnight rate will continue to hug the lower end of the LAF corridor with surplus liquidity in the banking system, dealers said.

Some traders were receiving swaps maturing up to two years on Friday, unwinding bond-swap trades they had entered into earlier due to a fall in short-term gilt yields. The spread of the two-year gilt yield over the two-year swap rate narrowed to less than 30 basis points on Monday, which led to traders taking profit, receiving swap rates and selling short-term gilts, dealers said.

Meanwhile, activity in the five-year swap rate was lower than usual as traders awaited fresh interest rate cues. A lack of significant movement in the 10-year US Treasury note also limited the activity in the tenure, dealers said. Offshore activity has dipped ahead of the MPC meet and before key US data points this week.

Moreover, both the benchmark one- and five-year swap rates are near key technical supports, dealers said. For the one-year swap rate, the support lies around 5.53%, which is likely to break only if the central bank's guidance on further rate cuts suggests a terminal repo rate below 5.50% is possible. Similarly, the five-year swap rate will only fall below 5.60% should the 10-year US Treasury yield come sharply down to near 4.30% from the current 4.42% levels, or if monetary policy easing is quicker or deeper than expected. 

"Offshore activity has been sort of mixed as US rates are going up and down because of the policy flip-flops," a dealer at a primary dealership said. "Not much is translating to the onshore market as yet, it is being dominated mostly on the domestic side."

OUTLOOK

On Wednesday, swaps may open steady as the MPC's three-day meeting begins, dealers said. Traders await RBI Governor Sanjay Malhotra's comments on growth, inflation, the rate-cut trajectory, and liquidity at the outcome on Friday.

A repo rate cut of 25 bps is priced into swap rates currently. If the panel cuts by a larger-than-expected amount, swap rates may slide on policy day. If the MPC holds pat on the repo rate, the entire OIS curve could shift upwards by 10 bps or more, dealers said.

The overnight movement of US Treasury yields may lend direction 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 swap rate could move closer to 5.70%. 

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 at 5.59-5.72%.

End

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

Edited by Deepshikha Bhardwaj

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