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Informist, Friday, Jul. 4, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended mixed as the longer end of the swap rate curve rose tracking an overnight rise in US Treasury yields, while swap rates of one-year and below fell after the Reserve Bank of India held a variable rate reverse repo auction for INR 1 trillion Friday, which was lower than what traders had expected.

The one-year swap rate ended at 5.50%, down slightly from 5.51% Thursday. The five-year swap rate ended at 5.68%, up from 5.65% Thursday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 397.80 billion, higher than INR 253.70 billion Thursday. The OIS curve steepened as the one-month swap rate fell by 6 basis points to 5.35% while the 5-year swap rate rose by 3 bps.

Swap rates maturing in more than a year rose tracking an overnight rise in US Treasury yields. The yield on the benchmark 10-year US Treasury note was 4.35% at 1700 IST, from 4.25% at the same time Thursday. US yields rose after data released Thursday showed non-farm payrolls in the US rose higher than expected in June, which weakened the case for rate cuts in the US. US government data showed the US added 147,000 jobs in June, against 110,000 forecast in a Wall Street Journal poll. The unemployment rate fell to 4.1% in June from 4.2% in May.

"USTs (US Treasury yields) have risen but there's some strong receiving which is preventing a further upward movement," a dealer at a state-owned bank said. "But US Treasury futures (prices) are up right now so that's also calming the market. The G-Sec market is also flat when UST has risen 10 bps overnight." 

However, the rise was limited as traders received fixed rate contracts due to levels seen lucrative, dealers said. Traders also tracked US Treasury futures, which indicated that the yield on the 10-year US Treasury note was around 4.31%, dealers said. US financial markets shut early Thursday and are shut Friday for American independence day. 

"I think the VRRR will continue to be INR 1 trillion only so MIBOR should be in a range only," a dealer at another private sector bank said. "But US (10-year) yield can go to 4.50% next so that will likely push up OIS."

Swaps maturing in one year or less fell after the RBI held a VRRR for INR 1.00 trillion, lower than traders' expectations of INR 1.5 trillion to INR 2 trillion. The RBI net absorbed INR 4.04 trillion from the banking system on Thursday, the highest since May 19, 2022, the central bank data showed. The high liquidity surplus sparked fears that the VRRR amount would increase from last week's INR 1 trillion, as RBI Governor Sanjay Malhotra had said in April that the central bank aimed to keep the liquidity surplus at around 1% of banks' net demand and time liabilities, which is INR 2.31 trillion as per latest data. The INR 1 trillion auction was just a roll-over of last week's auction, dealers said. 

At the VRRR auction, the RBI received bids worth INR 1.71 trillion, much more than the notified amount. Some traders expected the central bank to announce another VRRR Friday itself due to this, and were relieved when it did not, which further pulled down short-term swap rates, dealers said.

After the lower VRRR auction, the overnight Mumbai Interbank Offer Rate is seen in a range of 5.30-5.35% since a roll-over weekly VRRR such as Friday's is unlikely to push money market rates higher due to the surplus liquidity in the banking system, dealers said. The overnight MIBOR was 5.31% from 5.30% Thursday. 

OUTLOOK

Swaps are not traded Saturday. On Monday, swap rates are likely to take cues from movement in US Treasury yields over the weekend. Traders fear that the 10-year US yield could rise to 4.50%, from a technical perspective, after breaking the 4.20-4.30% range Thursday. 

Swap traders will also track any developments on US-India trade talks and trade talks between the US and its trade partner in general, as US President Donald Trump's Jul. 9 deadline for imposition of reciprocal tariffs nears. 

On the domestic front, traders will watch for announcements of further variable rate reverse repo auctions by the RBI. Traders are closely tracking overnight borrowing rates, which have cooled 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% Monday. The five-year contract is seen at 5.55-5.72%.

End

Edited by Akul Nishant Akhoury

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