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Informist, Tuesday, Jun. 17, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower across tenures Tuesday after Reserve Bank of India Governor Sanjay Malhotra's comments on inflation, rate cuts, and liquidity management, dealers said. Escalation in the conflict between Iran and Israel partially offset the fall in rates mid-afternoon.      

The one-year swap rate ended at 5.48%, lower than 5.52% Monday. The five-year swap rate ended at 5.69%, against 5.73% the previous session. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 263.25 billion, lower than INR 276.35 billion Monday.

Swap rates opened lower after the RBI governor, in an interview published in Business Standard newspaper Tuesday, said the space for policy easing would "open up" if "the inflation outlook turns out to be below our (the central bank's) projections". CPI inflation for May was 2.82%, below consensus estimates and lower than the RBI's forecast of 2.9% for Apr-Jun.

Swap traders received fixed rates on the possibility of another rate cut after Malhotra's comments, though swaps were not pricing it in yet, dealers said. Most dealers said the 1-year and 5-year swap rates were currently not pricing in any cuts in the repo rate, though the 2-year showed some possibility of a cut. 

"Whoever had paid positioning at 5.80% level (on the 5-year swap rate) with expectations that swaps would rise further has cut those positions today (Tuesday)," a dealer at a private sector bank said. "Traders had overreacted to the VRRR fears and they were oversold in swaps."

Malhotra also said it wasn't unusual for the weighted average call rate to trade closer to the RBI's Standing Deposit Facility rate in surplus liquidity conditions, and that variable rate repo or variable rate reverse repo auctions would not impact durable liquidity. This allayed some concerns, and led to a fall in short-term swap rates, dealers said. The overnight Mumbai Interbank Offer Rate - the floating leg of the OIS contract – fell to 5.30%, the lowest since Sep. 14, 2022, which furthered the fall in swap rates, dealers said. The spread between MIBOR and the 5-year swap rate was 39 basis points, which offered lucrative returns when receiving the 5-year swap. 

Around mid-afternoon, swap rates came off lows after Iran launched a fresh missile attack and Israel continued with its airstrikes. Al Jazeera reported that blasts rocked Tehran and air raid sirens went off in Tel Aviv. The Wall Street Journal reported that Israel had killed a senior Iranian commander in an airstrike in Tehran. 

Traders are still largely focused on growth estimates more than CPI inflation data, as inflation is expected to be on the lower end despite geopolitical shifts globally, dealers said. The geopolitical turmoil could have a larger impact on economic growth, dealers said.

"Inflation is already low, and for the next two quarters, it is already forecast on the lower side," a trader at a primary dealership said. "Even if crude oil rises, inflation will still be below 4.5%. It is only in Q4 (Jan-Mar) when it is already projected higher. Growth on the other hand is more likely to be affected by the geopolitical conflict."

Swaps fell again towards the end of trade, tracking a fall in government bond yields, dealers said. However, after falling below the key 5.72% level Tuesday, the 5-year swap rate was unable to fall below the 5.68% level due to strong paying bias at 5.68%, dealers said. 

OUTLOOK

On Wednesday, swap rates will track the movement of US Treasury yields and developments in the Iran-Israel conflict, dealers said. Longer-tenure swaps may also track the movement of gilt yields, dealers said. Traders will keenly track technical levels as swaps are seen largely range-bound due to lack of domestic cues, they said.

Traders await commentary from US Federal Reserve officials at the outcome of the US Federal Open Market Committee's meeting late Wednesday night. 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.

Traders will also track liquidity in the banking system, 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 5.40-5.52% Wednesday. The five-year contract is seen at 5.60-5.72%.

End

US$1 = INR 86.24

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

Edited by Avishek Dutta

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