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Informist, Monday, Jun. 16, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended down across tenures, tracking a fall in gilt yields in the second half of trading, dealers said. Swaps yields fell despite a rise in US Treasury yields over the weekend, as traders unwound paid contracts placed on Friday, dealers said. 

The one-year swap rate ended at 5.52%, down from 5.55% Friday. The five-year swap rate ended at 5.73%, down from 5.76% the previous session. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 276.35 billion, lower than INR 336.10 billion Friday.

Traders tracked the spread between the five-year 6.75%, 2029 gilt yield and the five-year swap rate, which was 23 basis points Monday, the same as at Friday's close. After compressing significantly, the spread is expected to stay constant due to a lack of fresh triggers, dealers said. When gilt yields fell later in the day as traders covered short bets, swap rates followed suit due to traders' gilt-linked positions, they said. 

Offshore and domestic participants Monday exited paid contracts which they had entered Friday, dealers. Swaps rates rose Friday, tracking a surge in crude oil prices and an escalation in the conflict between Iran and Israel, dealers said. On Monday, traders said swaps had priced in the rise in crude oil. Brent crude for August delivery was $73.49 a barrel at 1700 IST, down from $74.63 a barrel at the end of Indian market hours on Friday. Swap traders also ignored the rise in US yields over the weekend. The yield on the benchmark 10-year US Treasury note was 4.44% at 1700 IST, up from 4.34% at the same time Friday. US yields rose, tracking the rise in crude oil prices, amid fears of a surge in inflation.

"When US yields fell on Friday, swaps rose by 6-7 bps because of the geopolitical cues," a dealer at a private sector bank said. "So now when US yields are up also, we're moving downward."

Despite the geopolitical uncertainty on the global front, offshore traders were receiving Indian swap rates, dealers said. The curve of the non-deliverable OIS, an instrument traded offshore, has been consistently around 2 basis points below the OIS rate curve recently, dealers said. 

However, the decline in swap rates was limited as five-year swap rate saw paying interest at key 5.72% technical level, the lower end of the recent trading range. Some traders said they were paying the five-year contract at the 5.78% level, as the scope for a further fall in rates was limited. On the upper end, traders see the next technical level at 5.80-5.85% on the five-year swap.

Rates of swaps maturing in less than a year fell more as the liquidity surplus in the banking system was near a three-year high, dealers said. The Reserve Bank of India net absorbed liquidity was at INR 2.80 trillion Sunday, little changed from Saturday but down from the three-year high of INR 3.62 trillion Friday. However, swap rates are seen moving in a thin band due to a lack of significant cues. The scope for further 'steepening' of the swap rate curve--wherein short-term rates fall greater than the long-term rates--is seen limited. 

"We've already priced in whatever (rate) cuts are expected, there's not much easing seen now so short-term has lost all its juice," a dealer at another private bank said. "And not now, but at some point we'll start pricing in rate hikes, because we've priced in all the cuts. So now we'll be steady, but short-term has more scope to rise especially if a VRRR is announced."

Reuters on Wednesday reported that a source aware of the central bank's thinking said that "the RBI could start conducting variable rate reverse repo auctions to suck out surplus liquidity as and when required." This spooked the bond and swaps markets. While most of these fears cooled by the end of the week, dealers are still wary of the possibility of a VRRR auction announcement.

OUTLOOK

On Tuesday, swap rates will track the movement of US Treasury yields and developments in the Iran-Israel conflict, dealers said. Swaps may also track the outcome of the Group of Seven meeting, either indirectly or directly, dealers said. Longer-tenure swaps may also track the movement of gilt yields, dealers said.

Traders await commentary from US Federal Reserve officials on the outcome of the US Federal Open Market Committee's meeting later in the week. The FOMC is expected to hold interest rates steady at the meeting, but traders will closely track its economic projections for the rest of 2025. The FOMC is largely expected to cut rates twice by the end of December.

With domestic rate cuts seen nearly done after the RBI's rate-setting panel delivered a 50 bps cut in repo rate on Jun. 6, traders expect the swap rate curve to flatten slightly, dealers said.

Traders will also track the banking system's liquidity, and the overnight Mumbai Interbank Offer Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.52-5.58% Monday. The five-year contract is seen at 5.70-5.80%.

End

US$1 = INR 86.07

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

Edited by Deepshikha Bhardwaj

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