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Informist, Thursday, Jun. 19, 2025

 

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--Dealers: Unwound received OIS bets; 7 Fed officials see no rate cuts 2025 
--Dealers: US rate cut view bleak as Powell flags risk of higher inflation 
--CONTEXT: US FOMC held rates; median forecast shows 50 bps rate cut by Dec 
--Dealers: No US rate cuts may limit space for India MPC to cut rates 2025 
--Dealers: Oil price rise, intensifying Iran-Israel conflict pushing OIS up 
--Dealers: 5.73% key technical resistance for 5-year OIS 

 

MUMBAI – Overnight indexed swap rates, especially those maturing in more than a year, rose on Thursday as traders unwound received fixed rate bets after the US Federal Open Market Committee indicated that the outlook for further rate cuts in the world's largest economy was bleak, dealers said. The FOMC on Wednesday held rates steady, and projected lower growth, higher inflation and higher unemployment in the US for the rest of 2025. Seven US Federal Reserve officials expect no rate cuts in the rest of 2025, the Fed's projections on rates showed in the "dot plot" released along with the FOMC decision Wednesday.

 

"The FOMC has shown there is going to be low growth, high inflation and high unemployment (in the US)," a dealer at a private sector bank said. "Earlier, four people (Fed officials) saw no cuts in the rest of the year but now it's seven. I was not expecting this (outcome from the FOMC). The receiving we saw yesterday (Wednesday) is all unwinding now." The 5-year swap rate rose 5 basis points to 5.73% from Wednesday's close.

 

US Fed officials' median forecast continued to show two more rate cuts by the end of 2025. However, US Federal Reserve Chair Jerome Powell said, "No one holds these rate paths with a lot of conviction." Additionally, Powell flagged the risk of higher inflation in the US as a result of US President Donald Trump's tariff policies. He said that "ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer".

 

While US yields were unchanged after the FOMC outcome, Indian swap traders feared that less chances of rate cuts in the US could stall the rate cut cycle by the Reserve Bank of India's Monetary Policy Committee. The yield on the benchmark 10-year US Treasury note was 4.37%, unchanged from 1700 IST Wednesday. US markets are shut on Thursday.
 

Fears of fewer rate cuts are worsened by the ongoing conflict between Iran and Israel, dealers said. Traders fear that the US could get involved in the conflict, which would have far-reaching repercussions on the global economy. The subsequent rise in crude oil prices has also triggered fears of rising inflation in a country which is a net importer of crude oil. Traders estimate that Brent crude could hit $80 a barrel, and rise further to $100 if Iranian oil exports are targetted. The scope to cut rates with high crude oil prices was limited, dealers said. The price of India's crude oil basket was up $1.43 at $75.91 per barrel on Wednesday.

 

The rise in swaps was welcomed by traders who preferred receiving fixed rates, dealers said. Gains in swaps were limited as the 5-year swap rate hit the key 5.73% level, which is a good level for receiving fixed rates, dealers said. 

 

"Yesterday's (Wednesday's) OIS volumes in 5-year were the lowest in the past 10-12 trading sessions," a dealer at another private sector bank said. "No one wanted to trade at 5.68%, it was just too low." The notional traded amount in the 5-year swap rate was INR 38.70 billion Wednesday, the lowest since Jun. 3. 

 

However, the turmoil in the bond market could spill over to swaps and the 5-year swap could rise above the  5.73% level Thursday, dealers said. The benchmark 6.33%, 2035 gilt yield was 6.29%, 3 bps higher than Wednesday's close. Swap rates have been closely tracking government bond yields after the MPC's policy decision earlier this month left little to look forward to on the domestic rate cut front. 

 

"The VOLTS, the volatility index, was on the higher side today (Thursday) morning," a dealer at a private sector bank said. "It was similar to yesterday's (Wednesday's) level but when I saw the quotes from brokers today, I knew there wouldn't be any softening in the G-sec (gilt) yields. We're also seeing pressure from the rupee."  End

 

US$1 = INR 86.68

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

 

Reported by Cassandra Carvalho

Edited by Tanima Banerjee

 

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