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Informist, Friday, Jun. 27, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates inched up, with the four- and five-year rates rising the most on caution ahead of key US inflation data, dealers said. Some traders also paid swap rates in shorter tenures due to the rise in the overnight Mumbai Interbank Offered Rate, the floating leg of the OIS contract.

The one-year swap rate ended at 5.55%, from 5.54% on Thursday. The five-year swap rate ended at 5.71%, compared with 5.68% in the previous session. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 241.70 billion, similar to INR 255.20 billion Thursday.

Traders looked ahead to the release of US Personal Consumption Expenditure data for May, scheduled after Indian market hours. Hopes of a July rate cut in the US have grown after US Federal Reserve officials said inflation was moving towards the central bank's target of 2.0%. However, data released at 1800 IST showed the US Federal Reserve's preferred inflation gauge – the core personal expenditures price index – rose 2.7% on year in May, against a Dow Jones estimate of 2.6%. 

US data released Thursday was also mixed, and the odds of a July rate cut fell to 20.7% on Friday from around 25% at 1700 IST on Thursday, according to the CME FedWatch tool. Data released Thursday showed US GDP contracted more than earlier estimated in Jan-Mar, slipping 0.5% against 0.2% in the previous estimate. On the other hand, initial claims for state unemployment benefits fell to a seasonally adjusted 236,000 in the week ended Saturday, lower than economists' median forecast of 245,000. Though US Treasury yields did not move sharply, offshore traders paid fixed rates ahead of the inflation data, dealers said.

"The sense is PCE might be higher and US yields are going to bounce again," a dealer at a private sector bank said. "The weekly unemployment data was also not very good to see for those who are expecting a July rate cut in the US, so even in the morning, people had preferred to pay swaps."

The five-year swap rate also rose in early trade as some life insurers were likely entering bond forward-rate agreements, which create demand for long-term central government securities but lead to banks paying fixed rates in OIS, dealers said. Meanwhile, short-term swap rates were not significantly impacted by the offshore cues.

However, the rise in the overnight MIBOR fixing to 5.40%, its highest level since Jun. 6 and a rise of 10 bps from Thursday, led to some traders paying fixed rates in swaps maturing up to two years. The paying pressure was subdued as traders had paid fixed rates earlier in the week, anticipating such a rise after the Reserve Bank of India announced a seven-day, INR-1-trillion variable rate reverse repo auction for Friday, dealers said.

Overnight money market rates also rose sharply on Friday as the RBI accepted all offers of INR 849.75 billion at the auction, at a cut-off of 5.49%. Traders fear the central bank may conduct more of these short-term operations to mop up surplus liquidity above 1% of banks' net demand and time liabilities, which may keep the MIBOR fixing near the policy repo rate of 5.50% rather than the Standing Deposit facility rate of 5.25%.

"I don't see 5.50% as the operating rate and odds are in favour of a cut than a hike as the US will cut rates in the second half...," a dealer at a primary dealership said. Fed funds futures reflect a 73.2% chance of at least a 25 bps rate in the US by September, according to the FedWatch tool.

OUTLOOK

Swap rates are not traded on Saturdays. On Monday, swap rates are likely to take cues from the movement in US Treasury yields. The daily MIBOR fixing will lend cues after the initial hours.

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 as ending. 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, which rose Friday. 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

US$1 = INR 85.48

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

Edited by Saji George Titus

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