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Informist, Thursday, Jun. 19, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended sharply higher as traders unwound their received fixed rate bets as geopolitical and economic factors soured sentiment, dealers said. Swap rates rose further near the end of trade due to an rise in crude oil prices, dealers said. 

The one-year swap rate ended at 5.53%, higher than 5.48% Wednesday. The five-year swap rate ended at 5.75%, higher than 5.68% in the previous session. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 315.40 billion, higher than INR 224.05 billion Wednesday. The five-year swap rate rose 7 basis points, the biggest intraday rise since the Reserve Bank of India's Monetary Policy Committee meeting decision on Jun. 6.

Swap rates opened higher after the US Federal Open Market Committee indicated that the scope for further rate cuts in the US was bleak, dealers said. Wednesday, several traders had received fixed rate contracts on hopes that the outcome of the FOMC's meeting later in the day would indicate a pro-rate cut view, at least in the US Federal Reserve officials' quarterly projections on economy and rates, or "dot plot". A few traders were also expecting the FOMC to cut rates at the outcome, they said. 

The FOMC unanimously voted to hold rates steady for the fourth consecutive meeting. The Fed officials' median forecast continued to show two more rate cuts by the end of 2025. However, seven officials did not expect any reduction in rates in the rest of 2025. US Federal Reserve Chair Jerome Powell said, "No one holds these rate paths with a lot of conviction."

In a blow to bond traders, Powell also flagged the risk of higher inflation 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". Traders, especially from foreign banks, unwound their received positions as hopes of further rate cuts in the US faded, dealers said. 

"Around 20% of the market was thinking that the FOMC might do something (ease policy) because of pressure from Trump," a dealer at a private sector bank said. "The Fed has given us a surprise 50 bps cut last year and this time (in June) the RBI did the same, so there was that expectation in the market."

Trump has been pushing the US Federal Reserve to cut rates, but the Fed has held steady. After the FOMC decision, Trump in a post on Truth Social said 'Powell Is the WORST'. US markets will remain shut on Thursday to observe the Juneteenth day. The yield on the benchmark 10-year US Treasury note was 4.37%, unchanged from 1700 IST Wednesday. The 10-year US Treasury yield futures inched up slightly to 4.40%, dealers said. 

The rise in swap rates was heightened by an escalation in the conflict between Iran and Israel, dealers said. Dealers feared that the US could get involved in the crisis, the repercussions of which would spill over across the global economy. The Wall Street Journal citing sources said that Trump had privately approved of attack plans on Iran but withheld the final order. An Iranian missile hit an Israeli hospital, while Israel said it struck 100 targets in Iran. 

The subsequent rise in crude oil prices has also triggered fears of rising inflation in India, the country which is a net importer of crude oil, dealers said. Traders estimate that Brent crude could hit $80 a barrel, and rise further to $100 if Iranian oil exports are targetted. The Reserve Bank of India's Monetary Policy Committee would have no space to cut rates in such a scenario. Earlier this week, RBI Governor Sanjay Malhotra said that the space for policy easing would "open up" if the inflation outlook is below the central bank's projections. The price of India's crude oil basket was up $1.43 at $75.91 per barrel on Wednesday. 

Closer to the end of market hours, Brent crude for August delivery rose to $77.56 a barrel, from $76.44 a barrel at 0900 IST. The intraday rise led to the five-year swap rate rising above the key technical level of 5.75%, after breaking 5.73% earlier in the day. Both the 5.73% and 5.75% levels were good to receive fixed rates, dealers said. 

"We are seeing 5.78% as the next level on five-year OIS, then 5.80%," a dealer at another private sector bank said. "It went from 5.68% yesterday (Wednesday) to 5.78% today (Thursday), let's see where it goes tomorrow (Friday) before the weekend."

Traders were churning their positions in swaps, taking advantage of spreads between bonds and swaps for bond swaps and pared their risk, dealers said. The swap rate curve is no longer inverted and traders see no play on spreads across the curve, dealers said. Trade was two-sided, and dealers played on the recent trading range, they said. The five-year swap rate was the most preferred, due to its liquidity in notional trade volumes and because it is a better indicator of long-term views. 

OUTLOOK

On Friday, swap rates will track developments in the Iran-Israel conflict, dealers said. Longer-tenure swaps may also track the movement in gilt yields after the result of the INR-270-billion gilt auction, dealers said. Traders await the release of the minutes of the MPC's meeting in June. 

Traders may trim risk ahead of the weekend, though some traders expect a ceasefire agreement or deal to be settled between Iran and Israel soon. Additionally, some traders expect that the Organization of the Petroleum Exporting Countries and its allies could announce an increase in oil production, which could compensate for the lack of supply from Iran due to the conflict. Traders will keenly track technical levels as swaps are seen largely range-bound due to a lack of domestic cues, they said. Swap rates will also track the movement of the rupee against the dollar.

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% Friday. The five-year contract is seen at 5.60-5.80%.

End

US$1 = INR 86.72

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

Edited by Deepshikha Bhardwaj

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