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Informist, Monday, Jun. 9, 2025

By Aaryan Khanna and Srijita Bose

MUMBAI – Overnight indexed swap rates maturing above one year inched up Monday due to a rise in US Treasury yields, while those maturing within a year were flat. After the volatility on Friday following the Reserve Bank of India's Monetary Policy Committee cutting rates by a larger-than-expected quantum, traders said swap rates did not reflect further rate cuts in 2025, dealers said.

The one-year swap rate ended at 5.48%, flat against Friday's close. The five-year swap rate ended at 5.70%, up from 5.68% Friday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 619.35 billion, sharply down from INR 1.07 trillion Friday.

The yield on the 10-year benchmark US Treasury note was 4.50% at 1700 IST, up 11 basis points from the Indian market close on Friday. The rise in US yields was on account of better-than-expected US non-farm payrolls data, which showed a rise of 139,000 jobs in May, higher than analyst's estimate of 130,000 jobs in a Reuters poll. The five-year swap rate rose for the second day largely due to offshore traders paying fixed rates, dealers said. The rate had also surged on Friday as traders reassessed expectations of further rate cuts in India.

"5.73% (on the 5-year swap rate) is the next technical level which traders will watch out for," a dealer at a private sector bank said. "If US yields inch up sharply then we could see a further rise in the longer-end of the OIS curve."

However, it was the one-year OIS rate which was the most-traded, with its notional traded volumes near INR 100 billion on the 'ASTROID' trading platform. Domestic factors continued to influence near-term swap rates after the monetary policy outcome last week.

On Friday, the RBI's Monetary Policy Committee delivered a larger-than-expected 50-bps policy repo rate cut to 5.50%, while most traders were expecting a cut of 25 bps. Short-term swap rates slumped as the overnight cost of funding was seen shifting to the new Standing Deposit Facility rate of 5.25% from 5.75%. However, along with a rate cut, the rate-setting panel also unexpectedly changed its policy stance to 'neutral' from 'accomodative', which led traders to expect the terminal repo rate to remain at 5.50% this year.

Offshore traders were receiving fixed rates on the contrarian view that the MPC could cut the repo rate in October or December, while onshore traders paid fixed rates in the one-year swap, dealers said. The overnight Mumbai Interbank Offered Rate – the floating leg of the OIS contract – was set at 5.35% Monday, its lowest since September 2022.

"Because of spreads between money market rates, and fund managers hedging there's activity in OIS today (Monday)," a trader at primary dealership said. "Otherwise OIS is not moving like G-sec, some paying because of (the rise in) US yields."

Some traders fear the overnight MIBOR will rise in a few weeks, pushing up swap rates, and settle closer to the repo rate after RBI Governor Sanjay Malhotra mentioned variable rate reverse repo operations in the post-policy press conference, dealers said. He did not actually say the central bank was considering the tool, but said overnight rates should settle around 5.25% if the RBI does not suck out liquidity using the variable rate reverse repo operations. After market hours Monday, the central bank also said it will discontinue its daily variable rate repo operation on Wednesday after four months, a move which was expected by money market dealers due to the flagging interest in the daily auction as well as the neutral stance.

OUTLOOK

On Tuesday, swap rates may track the movement of US yields overnight, dealers said. Volatility in the domestic OIS market is likely to persist as traders readjust their positions after the surprise 50-bps repo rate cut on Friday, which was larger than expected. 

A further rise in US yields may see the 5-year OIS rate try to rise above the key 5.73% level, dealers said. Longer-tenure swap rates may also track the movement of government bond yields, dealers said.

Traders will also track the movement of the overnight MIBOR for direction on short-term swap rates. Swaps maturing up to one year are likely to draw flows from offshore traders as the rates do not reflect any rate cut in the next 12 months, dealers said, which remains a minority expectation.

The one-year swap rate is seen in a range of 5.40-5.55% Tuesday. The five-year contract is seen at 5.65-5.85%.

End

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

Edited by Tanima Banerjee

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