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Informist, Thursday, Jun. 12, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates were down Thursday due to an overnight fall in US Treasury yields, dealers said. Rates on swaps, especially of shorter tenures, fell as fears that the Reserve Bank of India may announce a variable reverse rate repo auction ebbed, they said.

The one-year swap rate ended at 5.55%, marginally lower than 5.56% Wednesday. The five-year swap rate ended at 5.73%, lower that 5.76% Wednesday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 300.10 billion, sharply lower than INR 849.25 billion Wednesday.

The yield on the 10-year US Treasury note fell to 4.41% from 4.50% at 1700 IST Wednesday after US CPI inflation rose 2.4% on year in May, in line with estimates of a Dow Jones poll. However, inflation is expected to accelerate in the coming months due to US President Donald Trump's reciprocal tariffs coming into effect.

Traders are now waiting for the outcome of the US Federal Open Market Committee meeting next week. The US Fed is widely expected to keep the policy rates unchanged on Jun. 18, with the CME FedWatch tool showing 99.8% chance of a status quo as of Wednesday. Traders will keep an eye out for the commentary of Fed officials and the Federal Reserve's "dot plot" for cues on the future trajectory of policy rates. At 1715 IST, the CME Group's FedWatch tool showed a 61.8% chance of the US FOMC cutting interest rates by 25 bps in its policy meeting in September.

"US yields are down so that was the initial trigger for five-year to open lower," a dealer at a primary dealership said. "But seems like onshore guys are mostly on the sidelines waiting for rates to settle...and anyway there are very limited rate cut expectations (in 2025), so play on rates is limited now."

Offshore traders, especially foreign banks, received fixed rates on the five-year swap as US yields fell, dealers said. Traders also likely received bets on the five-year swap as they expect the spread on the five-year benchmark government bond yield over the swap rate to widen from current levels, dealers said. This is as traders do not see further rate cuts by the RBI's Monetary Policy Committee in 2025 after the panel changed the policy stance to 'neutral' from 'accommodative' last Friday. The spread between the two rates is at over 24 basis points, lower than 36 bps nearly a month ago. 

Traders who had paid fixed rates on Wednesday unwound their positions Thursday as fears of a VRRR announcement cooled down, dealers said. Traders said a source-based report by Reuters on the reintroduction of VRRR auctions published Wednesday was unlikely to come true in the near term. Most traders do not expect a VRRR announcement as it seems contradictory to the RBI's policy of providing liquidity to banks for the transmission of monetary policy, dealers said.

"There are rumours that the RBI source quoted by Reuters has denied the VRRR auction story," a dealer at a primary dealership said. "This helped ease fears in the market and people, mostly from foreign banks, unwound their paid positions today (Thursday)."

Close to end of the session, rate on the one-year swap inched up from day's low after India's CPI inflation data for May showed core CPI inflation had risen to a 19-month high of 4.2%. Though the headline CPI inflation for May fell to an over six-year low of 2.82%, lower than an Informist poll estimate of 3.0%, rates did not react sharply as traders do not expect the lower inflation print to spur expectations of rate cut, dealers said.

OUTLOOK

On Friday, swap rates may track the overnight movement of US yields after release of US economic data, dealers said. Longer-tenure swaps may also track the movement of gilt yields, dealers said.

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 are also waiting for the US FOMC statement next week for its outlook on rates, they said.

Traders will also track the overnight Mumbai Interbank Offered Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.52-5.58% Friday. The five-year contract is seen at 5.72-5.80%.

End

Edited by Ashish Shirke

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