India IRS Review
Steady ahead of MPC decision; up to 1-yr OIS volumes rise
This story was originally published at 18:42 IST on 4 June 2025
Register to read our real-time news.Informist, Wednesday, Jun. 4, 2025
By Srijita Bose
MUMBAI – Overnight indexed swap rates ended largely steady on caution ahead of the decision of the Reserve Bank of India's Monetary Policy Committee Friday. Trade volumes on shorter-tenure swaps maturing in up to one year rose as traders positioned for the domestic rate decision, dealers said.
The one-year swap rate ended at 5.54%, against 5.55% on Monday. The five-year swap rate ended at 5.64%, flat from Tuesday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 381.90 billion, up from INR 281.45 billion Tuesday. Volumes in short-term swaps of up to one year rose to INR 262.65 billion on Wednesday from INR 165.70 billion on Tuesday.
The three-day meeting of the rate-setting panel began Wednesday and traders have already positioned for a 25-basis-point cut, dealers said. Some traders even speculate that the MPC could cut rates by 50 bps, despite the strong GDP print for Jan-Mar. SBI Research, in a note, advocated for a 50 bps cut in the repo rate Friday. The market widely expects a 25 bps cut to 5.75% on Friday.
Short-term swap rates reflected a terminal repo rate of 5.50%, reflecting only a slight chance of further rate cuts beyond that due to the higher-than-expected GDP growth in Jan-Mar, dealers said. India's GDP growth for Jan-Mar rose to a four-quarter high of 7.4%, sharply higher than the consensus estimate of 6.8%.
With rate cuts already priced in, traders preferred to take bets in shorter-tenure swaps as they provide a lower exposure, dealers said. "There was some receiving bias in short-term (swaps) today (Wednesday)," a dealer at a primary dealership said. "Mostly, offshore guys were receiving in short-term swap (one-year OIS) instead of buying bonds."
Short-term swaps inched lower Wednesday on the expectation that the overnight Mumbai Interbank Offered Rate – the fixed leg of the OIS contract – will fall by 20-25 basis points after the repo rate cut Friday. Offshore traders likely received short-term swaps while paying on swaps maturing in two to five years, dealers said.
"A lot depends on the MPC now and how the (RBI) Governor's tone is," a dealer at a private sector bank said. "Banks have cash, but right now, most domestic guys have already positioned for Friday's outcome and even though some traders are taken, people are not going aggressive in swaps."
Traders await RBI Governor Sanjay Malhotra's policy statement to gauge the rate cut trajectory and any commentary on liquidity, inflation and growth, dealers said. Traders speculate that the central bank's focus could be on liquidity, with some traders now expecting that the central bank will widen the Liquidity Adjustment Facility corridor to 50 basis points on either side of the RBI's repo rate from 25 bps currently.
OUTLOOK
On Thursday, swaps may open steady as traders await the MPC's policy decision, dealers said. Traders are awaiting the RBI governor's comments on growth, inflation, the rate-cut trajectory, and liquidity on Friday.
A repo rate cut of 25 bps is priced into swap rates currently. If the panel cuts the repo rate by a larger-than-expected quantum, 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%.
At 1700 IST | TUESDAY | |
1-year OIS | 5.54% | 5.55% |
2-year OIS | 5.43% | 5.43% |
5-year OIS | 5.64% | 5.64% |
2-year MIFOR | 5.94-6.06% | 5.94-6.06% |
5-year MIFOR | 6.15-6.27% | 6.15-6.27% |
End
Edited by Saji George Titus
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