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Informist, Wednesday, Jul. 9, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates rose slightly earlier Wednesday after the Reserve Bank of India held a two-day variable rate reverse repo auction for INR 1.00 trillion but ended the session steady. The yield on the 10-year benchmark US Treasury note remained elevated at around 4.40%, which also lent an upward bias to swap rates, dealers said.

The one-year swap rate ended at 5.53%, slightly up from 5.52% Tuesday. The five-year swap rate ended at 5.70%, marginally down from 5.71% Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 265.20 billion, higher than INR 164.95 billion Tuesday.

Swap rates opened higher after the central bank announced a two-day VRRR auction in the after-market hours Tuesday. But the rise was limited as some traders had expected such an announcement by the RBI. Overnight money market rates rose following the VRRR, but still traded at comfortable levels, dealers said. The weighted average call money rate at 1730 IST was 5.32%, up from 5.26% Tuesday, while the weighted average tri-party repo rate was 5.29%, against 5.13% in the previous session.

"It's now clear that the RBI will step in (with VRRRs) if liquidity is above INR 2.00 trillion, above 1% (of banks' net demand and time liabilities), or if the overnight rates fall below the standing deposit facility rate," a trader at a primary dealership said.

Dealers had expected the central bank to announce a VRRR auction in addition to expectations of a VRRR Friday to roll over last week's INR 1.00-trillion amount, which is due for reversal at the end of this week. The systemic liquidity surplus has been above INR 3.00 trillion this week, and RBI Governor Sanjay Malhotra had said in April that the central bank aims to keep the surplus at around 1% of banks' NDTL. The 1% figure is approximately INR 2.31 trillion, as per latest data.

Some traders expect the central bank to start daily VRRRs, while others expect Friday's auction to be for INR 2.00 trillion, which would roll over both last week's and Wednesday's auction amounts. The overnight Mumbai Interbank Offer Rate rose to 5.36%, up 7 basis points from Tuesday.

Some traders were also expecting a trade deal between India and the US to be announced overnight, after media reports said the announcement may come before 2200 IST Tuesday. The lack of a deal between the countries also pushed up swap rates, dealers said.

However, some banks and corporate entities received fixed rate contracts at levels seen to be lucrative, which offset the rise in swaps, dealers said. A dealer said some corporate entities were hedging their short-term debt issuances by receiving the six-month and one-year swap rates. The one-year swap was the most traded Wednesday, at INR 50.25 billion, followed by the six-month swap at a notional volume of INR 45.60 billion.

Earlier in the day, a fall in the rupee against the dollar also pushed up swap rates, dealers said. Traders will now wait for CPI data from India and the US for further cues on the interest rate trajectory in both countries.

"Now, if (India's) inflation is significantly lower, then swaps can break the range, else we'll be here itself," said a dealer at a private-sector bank. India's CPI inflation for June is due Monday, and traders expect a print of around 2.30%, same as an Informist poll estimate.

OUTLOOK
Thursday, swap rates are likely to take cues from the overnight movement in US Treasury yields after the minutes of the US Federal Open Market Committee's June meeting due after market hours. Traders fear, from a technical perspective, that the 10-year US yield could rise to 4.50% after hovering near 4.40% this week.

Swap traders will also track developments in US-India trade talks and the negotiations between the US and its other trading partners, dealers said. The impact of a US-India trade deal, or the lack of one, will be seen on swaps through the movement of the rupee against the dollar, dealers said.

On the domestic front, traders will watch for announcements of further VRRR auctions by the RBI. They are closely tracking overnight borrowing rates. The overnight 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% Thursday. The five-year contract is seen at 5.68-5.78%.

End

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

Edited by Nishant Maher

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