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Informist, Wednesday, Jun. 25, 2025

By Aaryan Khanna

NEW DELHI – Short-term overnight indexed swap rates surged after the Reserve Bank of India announced its first variable rate reverse repo auction since November. The drain in liquidity at the margin and even over a short-term will likely drive overnight fixings of the Mumbai Interbank Offered Rate higher, dealers said.

Both one- and two-month swap rates rose nearly 6 basis points each, with higher than usual trade volumes. "The MIBOR fixings will rise by about 10 basis points by next week, so short-term swaps are moving up immediately," a dealer at a primary dealership said. "And if the RBI continues to conduct these auctions then we'll soon have fixings at around 5.50%. It depends on what signal the RBI wants to send, which is not clear immediately."

The one-year swap rate ended at 5.54%, from 5.49% Tuesday. The five-year swap rate ended at 5.69%, compared with 5.67% on the previous session. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 550.25 billion, higher than INR 468.25 billion Tuesday.

The RBI Tuesday said it would conduct a seven-day, INR-1-trillion variable rate reverse repo auction at 1000-1030 IST Friday. Following this, Nomura expects the MIBOR – the floating leg of the OIS contract – to be fixed at 5.35-5.40% going ahead, it said in a report Wednesday. The MIBOR rate had been fixed at 5.30% between Jun. 17 and Tuesday, and inched up to 5.33% on Wednesday.

Rates strategist Nathan Sribalasundaram held on a low conviction on receiving the two-year non-deliverable OIS for a target of 5.25%, though he said the bar for rate cuts was higher after the VRRR announcement and called the move "confusing". Earlier this week, Nomura's economists said they expected another 50 bps of repo rate cuts by the RBI's Monetary Policy Committee in the current cycle, to 5.00%.

OIS rates up to two years until Tuesday reflected no rate cuts or hikes in the next 12 months after the MPC's stance change to "neutral", but assumed a MIBOR fixing consistently at 5.30%, dealers said. That assumption broke down after the RBI's announcement, though overnight money market rates are not seen near the policy repo rate of 5.50% immediately. The one-year OIS was the most-traded contract on Wednesday, with notional traded volumes rising to INR 112.90 billion, the highest since Jun. 11. 

Meanwhile, the five-year swap rate saw two-way trade as the domestic trigger led to traders paying the swap rates across tenures. However, the rise in the five-year rate was limited due to a fall in crude oil prices and US Treasury yields, both of which led to offshore traders receiving fixed rates. Brent crude for August delivery was at $67.55 a barrel at 1700 IST, down over 2.4% from the end of Indian market hours Tuesday. The yield on the benchmark 10-year US Treasury note was 4.30%, down from 4.34% at 1700 IST Tuesday.

Traders said the threat of the conflict between Israel and Iran flaring up was minimal and had passed after a ceasefire was brokered by US President Donald Trump on Tuesday. Meanwhile, two Federal Open Market Committee members have opined in the past week that the panel could cut rates by 25 bps in July if the impact of US tariffs on US inflation remains minimal. On the other hand, Raphael Bostic, head of the Federal Reserve Bank of Atlanta, said Tuesday that the central bank could wait to cut rates.

"There should actually have been some more relief in the longer end of the swap curve today (Wednesday) as the ceasefire (between Iran and Israel) has not been broken," a dealer at a private sector bank said. "So that risk premium in oil is subsiding, and then US is also making noises to cut rates in July – all in all, I don't see much threat to the five-year swap from the VRRR announcement." The five-year swap rate on Tuesday had closed at its lowest since Jun. 5.

OUTLOOK

On Thursday, swap rates are likely to open steady after the recent volatility, dealers said. The overnight movement in US Treasury yields and crude oil prices will lend cues early in the day, while the daily MIBOR fixing will lend cues after the initial hours.

The spread of the five-year swap rate over the one-year swap rate is likely to reduce in the coming days as traders assess the impact of the RBI's announcement of a VRRR auction on Tuesday. The seven-day, INR-1-trillion auction's result on Friday will be a key factor for OIS traders to estimate surplus liquidity in the banking system over the next week, and the overnight MIBOR fixings, dealers said.

On the global front, Brent crude futures for August delivery are expected to stay below $70 a barrel as the conflict between Israel and Iran is seen at an end. Comments from US Federal Reserve officials on further rate cuts will continue to be tracked closely as expectations of a July rate cut have increased over the past week.

Swap rates may also track the movement of gilt yields. The one-year swap rate is seen in a range of 5.46-5.60% Thursday. The five-year contract is seen at 5.62-5.84%.

End

US$1 = INR 86.0850

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

Edited by Deepsikha Bhardwaj

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