Informist, Tuesday, Jun. 10, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates rose Tuesday as traders unwound their earlier received bets because they do not see further rate cuts by the Reserve Bank of India's Monetary Policy Committee rest of the year. A rise in government bond yields along with caution before US CPI inflation print on Wednesday also led to rise in swap rates, dealers said.

The one-year swap rate ended at 5.54%, up from 5.48% Monday. The five-year swap rate ended at 5.73%, up from 5.70% Monday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 969.25 billion, higher than INR 619.35 billion Monday.

"OIS is up tracking the 10-year gilt yield now...also now that domestic rate cuts are over, US CPI will be important for US yields, so that caution is also there," a dealer at a private sector bank said. "Some unwinding of trades was also there by some offshore traders today (Tuesday)." The yield on the 10-year benchmark gilt has risen by nearly 10 basis points since Thursday's close before the RBI's rate-setting panel announced its policy decision. 

Swap rates on contracts maturing in up to one-year rose more than longer-tenure contracts as traders do not see further rate cuts by the Monetary Policy Committee for the rest of the year, dealers said. Swap rates did not reflect further rate cuts in 2025, they said. Domestic factors continued to influence near-term swap rates after the monetary policy outcome last week.

Some paying in extreme shorter-tenure swaps such as the one-month swap was on expectations that liquidity surplus will fall due to scheduled outflows during the month, dealers said. On Monday, the RBI net absorbed INR 2.45 trillion, central bank data showed. Speculation that the central bank could bring back variable reverse rate repo auctions after it discontinued the daily variable rate repo auctions also led to paying in short-end OIS, they said. A fall in liquidity would lead to a rise in the overnight Mumbai Interbank Offered Rate – the floating leg in an OIS contract.

"There is some panic in the market after the RBI cancelled the daily VRRs that maybe they (RBI) will now bring VRRRs so paying in OIS is also because of that," a dealer at another private sector bank said. "RBI has to give some confidence to the market to stop the sell-off."

Swaps maturing above one-year were down in the first half of the trading session due to an overnight fall in US Treasury yields, dealers said. The yield on the 10-year benchmark US Treasury note fell to 4.45% from 4.51% at 1700 IST Monday. A large infrastructure finance corporation also likely received fixed rates on the five-year swap against their bond issuance, dealers said. However, caution ahead of US CPI inflation print on Wednesday as well as dampened sentiments on domestic rate cuts led to an uptick in longer-tenure swaps, they said.

OUTLOOK

On Wednesday, 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. 

Traders will wait for US CPI inflation data on Wednesday as the next trigger for US yields. With domestic rate cuts seen nearly done after the RBI's rate-setting panel delivered a 50 bps cut in the repo rate Friday, traders are now more keenly tracking US yields and data, dealers said. Traders also await the US Federal Open Market Committee statement next week for an outlook on rates, they said.

A further rise in US yields may see the five-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% Wednesday. The five-year contract is seen at 5.65-5.85%.

End

Edited by Ashish Shirke

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