India IRS Review
Steady on lack of fresh cues; fears of more VRRRs weigh
This story was originally published at 18:08 IST on 30 June 2025
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By Srijita Bose
MUMBAI – Overnight indexed swap rates ended largely steady Monday owing to a lack of fresh cues on interest rates and caution about the Reserve Bank of India announcing more variable rate reverse repo auctions, dealers said. Some traders received fixed rates after the rise in long-term swap rates Friday and a slight fall in US Treasury yields, they said.
The one-year swap rate ended at 5.54%, from 5.55% on Friday. The five-year swap rate ended at 5.71%, flat from Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 116.10 billion, lower than INR 241.70 billion Friday.
"There is a possibility that RBI could come up with more VRRRs," a dealer at a private sector bank said. "So that is definitely playing on people's minds because that will shift the overnight rates."
Traders are keenly watching the RBI's liquidity management after the central bank Friday conducted the first VRRR operation since November. Traders speculated that the central bank could conduct more such auctions to align the overnight rates near the repo rate, dealers said. Some said that a VRRR could be announced Tuesday after the end of the Apr-Jun quarter, as liquidity surplus is expected to be comfortable after the government's month-end spending. Others said that an announcement could come on Friday when last week's seven-day, INR 1-trillion VRRR is due for reversal, dealers said.
The rise in the overnight Mumbai Interbank Offered Rate, the floating leg of the OIS contract, to 5.52%, its highest level since Jun. 5, led to some traders paying fixed rates in swaps maturing up to two years. The MIBOR was 5.40% on Friday. However, the paying pressure was subdued as traders had paid fixed rates on Friday, after the VRRR auction and a rise in overnight MIBOR, dealers said.
The intraday rise in swap rates in the five-year contract was also limited as the yield on the 10-year US Treasury note eased slightly to 4.25% during the day from 4.27% at 1700 IST Friday. Some offshore traders likely received fixed rates on the five-year swap while buying shorter-tenure Indian government bonds, dealers said.
Market participants are now awaiting comments by US Federal Reserve Chair Jerome Powell, who will join other central bank chiefs at the European Central Bank forum in Sintra on Tuesday. Powell's remarks may offer some insight into the US economy and monetary policy. Traders still anticipate two rate cuts by the US Federal Open Market Committee this year. According to the CME FedWatch tool, traders see a 78.8% probability of the Fed holding rates at the July meeting of the FOMC, though the chances of a July cut have increased over the past week.
"There are no rate cut expectations now, so mostly swaps are moving in a narrow range," a dealer at another private sector bank said. "Now, if there are rate cuts in the US, that could trigger some fall in swaps."
OUTLOOK
On Tuesday, swap rates are likely to take cues from the movement in US Treasury yields. The daily MIBOR fixing will also 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 the 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. Some traders said that if the FOMC votes to cut rates in July, then the five-year swap rate could also fall by more than 10 bps as domestic rate cut expectations could resurface.
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% Tuesday. The five-year contract is seen at 5.62-5.84%.
At 1700 IST | THURSDAY | |
1-year OIS | 5.54% | 5.55% |
2-year OIS | 5.51% | 5.52% |
5-year OIS | 5.71% | 5.71% |
2-year MIFOR | 5.92-6.04% | 5.91-6.03% |
5-year MIFOR | 6.16-6.28% | 6.16-6.28% |
End
US$1 = INR 85.76
Edited by Saji George Titus
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