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Informist, Monday, Jul. 7, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady Monday due to a lack of significant triggers, dealers said. Nearing the end of trade, swap rates rose slightly, tracking an intraday rise in US Treasury yields, dealers said.

The one-year swap rate ended at 5.51%, slightly up from 5.50% Friday. The five-year swap rate ended at 5.68%, flat compared to Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 204.40 billion, lower than INR 397.80 billion Friday. The notional trade volume in the 5-year swap rate was INR 29.45 billion, the lowest in nearly two weeks. The 5-year non-deliverable OIS rate was around 5.67%, dealers said. 

Some offshore traders likely received fixed rate contracts, but this was offset by domestic traders paying fixed rate contracts on fears of a variable rate reverse repo auction announcement by the Reserve Bank of India, dealers said. Volume in the six-month swap rate picked up due to fears of a VRRR announcement, dealers said.  

On Friday, the RBI net absorbed INR 4.25 trillion from the banking system, higher than Thursday's figure of INR 4.04 trillion, central bank data showed. Subsequently, money market rates cooled, with the weighted average tri-party repo rate at 5.11%, from 5.18% Friday. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – was 5.30%, from 5.31% Friday. 

Some market participants fear that the RBI could introduce daily VRRR auctions, which would subsequently lead to flattening of the swap rate curve, they said. Some traders said the RBI could announce a VRRR post market hours Monday or Tuesday, while others said the central bank could introduce a VRRR higher than the INR-1-trillion roll-over amount for Friday. Traders were cautious until there was clarity on the RBI's measures on liquidity management, which was also why the notional trade volume was low, they said. 

"I think the RBI is waiting for this (the high surplus liquidity) to normalise within a few days," a dealer at a private sector bank said. "We have excise duty outflows this week so maybe the liquidity will reduce. If it doesn't, then we could see additional VRRR auctions along with (the INR-1-trillion roll-over) auction on Friday." 

Swap rates inched up in the last hour of trading after the yield on the benchmark 10-year US Treasury yield rose, dealers said. The 10-year US yield was 4.36% at 1700 IST, from 4.34% at 0900 IST and 4.25% at 1700 IST Thursday. US financial markets were shut Friday for American Independence Day. Dealers said US Treasury yields were moving due to technical factors, and that the negative factors for bonds in the US were priced in. Traders now await the minutes of the US Federal Open Market Committee's June meeting, due Wednesday.

"US (yields) are just being traded on technicals right now. I think all the negatives from the strong data, the spending bill and the tariffs are priced in," a dealer at another private sector bank said. "There's no news that US yields are tracking, which is why our reaction to them is also muted. The 4.37-4.38% level (on the 10-year US yield) is hard to break, after which 4.50% is the next level on the upside." 

Traders also awaited any indication of a trade deal between the US and India, dealers said. While it is not likely to impact swaps significantly, a trade deal between the two partners, or the lack of one, could cause a knee-jerk reaction in swaps, they said. US President Donald Trump said in a post on Truth Social that "any country aligning themselves with the anti-American policies of BRICS will be charged an additional 10% tariff." Trump also confirmed that tariffs announced in April would take effect on Aug. 1 for countries without a deal. Treasury Secretary Scott Bessent said Sunday these tariffs will indeed be enforced from Aug. 1 for countries that have not finalised an agreement with the Trump administration. 

OUTLOOK

On Tuesday, swap rates are likely to take cues from the overnight movement in US Treasury yields. Traders fear that the 10-year US yield could rise to 4.50%, from a technical perspective, after remaining above the 4.20-4.30% range. 

Swap traders will also track any developments on US-India trade talks and trade talks between the US and its other trade partners in general, dealers said.  

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 last week. The daily MIBOR fixing will also lend cues after the initial trading 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% Tuesday. The five-year contract is seen at 5.55-5.72%.

End

Edited by Tanima Banerjee

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