More Stories

Informist, Wednesday, Jul. 2, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended broadly steady with a downward bias Wednesday. The fall in swap rates was likely on account of offshore flows, with some onshore, despite an overnight rise in US Treasury yields, dealers said. Fears of a mid-week variable rate reverse repo auction eased, and a fall in the overnight Mumbai Interbank Offer Rate also lent a downward bias to swaps, they said.

The one-year swap rate ended at 5.52%, down slightly from 5.53% Tuesday. The five-year swap rate ended at 5.67%, unchanged from Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 297.65 billion, slightly higher than INR 276.85 billion Tuesday.

Swaps rates inched lower across the curve as the MIBOR rate fell to 5.30%, from 5.35% Tuesday, due to a rise in the liquidity surplus in the banking system. Tuesday, the liquidity net absorbed by the Reserve Bank of India was INR 3.32 trillion, higher than INR 2.62 trillion Monday.

The downward bias in swap rates was despite an overnight rise in US Treasury yields. The yield on the 10-year benchmark US Treasury note rose to 4.28% at 1700 IST, from 4.19% at the same time Tuesday. US yields rose after US Federal Reserve Chair Jerome Powell reiterated that the central bank plans to wait for more data before starting monetary policy easing but did not rule out a cut in July. From a technical perspective, swap traders were hoping the 10-year US yield would fall to 4.10% overnight.

"The 10-year UST (US Treasury yield) was at the technical 4.20-4.22% when we closed last night and then it rebounded very decently," a dealer at a private-sector bank said. "But we are seeing a strong flow today (Wednesday) in swaps, so that's preventing an upward rise. Since my first trade today morning, they are just receiving my offers."

Speaking at a central banking conference in Sintra, Portugal, Powell said it was too early to determine if July is the right time for a rate cut, emphasising that decisions will be made on a meeting-by-meeting basis based on incoming data.

US yields rose further after the Republican-controlled Senate passed President Donald Trump's contentious tax-and-spending bill, which is expected to add $3 trillion to the federal deficit over the next decade.

However, offshore flows pulled swap rates down, and foreign portfolio investors actively bought gilts, possibly on expectations of low non-farm payrolls data for June, dealers said. The five-year non-deliverable OIS rate was 5.65-5.66%, slightly lower or at par with the five-year swap rate during the day, dealers said. Since the US Federal Open Market Committee is data-dependent for its outlook on rate cuts, traders are betting on the jobs data indicating weakness in the world's largest economy. Non-farm payrolls are seen rising by 110,000 in June, according to consensus estimates by The Wall Street Journal, against a rise of 139,000 in May.

On the domestic front, fears of another VRRR auction eased as the RBI did not announce another VRRR auction Monday or Tuesday. Traders said the next auction may only be announced for Friday, when last week's VRRR is due for reversal. Last week, the RBI accepted bids worth INR 849.75 billion at the INR 1-trillion VRRR auction. However, traders expect that a VRRR for Friday could be higher than INR 1.00 trillion, due to the recent increase in surplus liquidity and subsequent fall in overnight borrowing rates. The weighted average tri-party repo rate was 5.14% Wednesday, lower than 5.19% Tuesday. The call money market rate was last traded at 4.85%.

"All swaps have fallen by around 1 bp (basis point) because MIBOR has fallen, but there's nothing much happening there," a dealer at another private-sector bank said. "Overnight rates are between 5.25% and 5.50% and below that also today (Wednesday), and the VRRR, even if it comes now with 2 lakh crore (INR 2 trillion), it won't affect the liquidity. If the VRRR doesn't come at all then we (OIS rates) can fall much more."

Traders expect the five-year swap to trade in a thin range of 5.65-5.76%, the lower end of which is appealing to pay fixed rate contracts. The key technical level of 5.65-5.66% is being closely tracked, they said.

OUTLOOK

Thursday, swap rates are likely to take cues from movement in US Treasury yields after the release of the US June ADP National Employment Report that was due 1745 IST. Swap traders are closely tracking comments from Fed officials and the movement of US yields. Some traders said that if the FOMC votes to cut rates at the end of this month, then the five-year swap rate could also fall by more than 10 bps as domestic rate cut expectations could resurface.

After market hours Thursday, traders will track the US employment report for June and US weekly jobless claims for the week ended Saturday. US financial markets are shut Friday for American independence day.

On the domestic front, traders will now watch for announcements of further variable rate reverse repo auctions by the RBI. Traders are closely tracking overnight borrowing rates, which cooled slightly Wednesday after rising earlier in the week. The daily MIBOR fixing will also lend cues after the initial hours.

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% Thursday. The five-year contract is seen at 5.62-5.84%.

US$1 = INR 85.70

End

Edited by Rajeev Pai

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.