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Informist, Thursday, Jun. 26, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended largely steady owing to a lack of fresh cues on interest rates. Some traders received fixed rates after the sharp rise in near-term swap rates Wednesday and a fall in US Treasury yields, dealers said.

The one-year swap rate ended at 5.54%, flat from Wednesday's close. The five-year swap rate ended at 5.68%, compared with 5.69% in the previous session. The total notional trade volume on Clearing Corp. of India's derivatives trading platform halved to INR 255.20 billion, from INR 550.25 billion Wednesday.

Following the Reserve Bank of India's announcement of a variable rate reverse repo auction for Friday, traders feared the overnight fixings of the Mumbai Interbank Offered Rate would be higher than the current 5.30%, dealers said. On the other hand, traders said the seven-day, INR 1.00-trillion VRRR auction would not drain enough liquidity to push rates closer to the policy repo rate of 5.50%. The RBI probably announced the operation to mop up additional liquidity from the government's month-end spending next week, with a proxy for the liquidity surplus in the banking system at around INR 2.50 trillion Thursday.

Moreover, swap rates maturing under one year had risen 4-6 basis points Wednesday, and some traders were of the view these levels were lucrative to receive fixed rates. The one-year swap rate ended flat but was the most-traded owing to dichotomy in views on the overnight rate, dealers said. Most traders were of the view that the overnight MIBOR would continue to be fixed between the standing deposit facility rate of 5.25% and the repo rate of 5.50%.

"The crux of the trade in OIS right now is what level (of overnight rates) is the RBI targeting," a dealer at a primary dealership said. "And my sense is that they are looking to defend 5.25% rather than push it to 5.50%, so there is hefty receiving in the three-month and six-month OIS if you want to go and pay in any size."

Some traders said the announcement of the VRRR auction suggests there is a higher chance of the RBI's Monetary Policy Committee cutting rates in the coming months as the central bank seems to be avoiding a "stealth" rate cut by injecting liquidity. Others, such as Nomura, say the announcement is "confusing" and raises the bar for rate cuts in the future. There are currently no rate cuts or hikes priced into the one-year swap rate, dealers said.

Swap rates opened lower due to a slight overnight fall in US yields due to increasing expectations of the US Federal Open Market Committee cutting interest rates by 25 bps in July. The panel has not cut rates so far in 2025 after cuts of 100 bps Sept-Dec, but recent comments from some US Federal Reserve officials have suggested further policy easing is on its way. Fed funds futures show a 24.8% probability of a 25-bp rate cut next month, doubling from a week ago, according to the CME FedWatch tool.

The yield on the 10-year benchmark US Treasury note was 4.27% at 1700 IST, marginally down from 4.29% at the end of Indian market hours Wednesday but hitting its lowest level since early May. The benchmark yield was at a key technical breakpoint, dealers said, and if the level is broken, the yield could fall below 4% in the coming days. However, some traders unwound their received fixed-rate bets on the five-year swap rate below 5.68%, a psychologically crucial level, limiting the fall.

"There is some broad receiving because of the US yields. In fact, five-year didn't go up much yesterday (Wednesday) because they have been weaker," a dealer at a private-sector bank said. "But the volume of positioning there has been pretty light, and the action is mostly in the short term due to the domestic situation."

OUTLOOK

Friday, swap rates are likely to open steady, 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 Tuesday of a VRRR auction. The result of the seven-day, INR 1-trillion auction 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 Fed officials on further rate cuts will continue to be tracked closely as expectations of a July rate cut in the US have increased over the past week.

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

End

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

Edited by Rajeev Pai

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