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Informist, Thursday, Jul. 10, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended largely steady Thursday in thin trade. A decline in swap rates, tracking an overnight fall in US Treasury yields, was offset by concerns that the Reserve Bank of India may announce a variable rate reverse repo auction worth INR 2 trillion, dealers said.

The one-year swap rate ended at 5.52%, slightly down from 5.53% Wednesday. The five-year swap rate ended at 5.69%, marginally down from 5.70% Wednesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 106.35 billion, sharply lower than INR 265.20 billion Wednesday.

The yield on the benchmark 10-year US Treasury note was 4.35% at 1700 IST, down from 4.41% at the same time Wednesday. Foreign banks likely received swap rates tracking the fall in US yields, dealers said. US yields fell due to a shift in sentiment after most US Federal Reserve officials hinted at potential rate cuts later in the year in the minutes of the US Federal Open Market Committee's June meeting. There was also a growing divide on future policy among Fed officials. "Most participants assessed that some reduction in the target range for the federal funds rate this year would likely be appropriate," the minutes stated, adding that economic growth and hiring could weaken going forward.

"I think the 5-year (swap rate) is fine (performed decently in reaction to US yields)," a trader at a primary dealership said. "It's one to one-and-a-half basis (points) down, which is fine given the VRRR expectation."

However, onshore traders paid fixed rate contracts on fears that the RBI would announce a variable rate reverse repo auction of INR 2 trillion post market hours. Some traders expect the RBI hold either a seven- or 14-day VRRR on Friday as two previous auctions worth INR 1.97 trillion are due for reversal on that day. 

Dealers estimate the notified amount of the auction at INR 1.5 trillion to INR 2 trillion. Traders are also keeping an eye on overnight rates with the overnight Mumbai Offered Interbank Rate rising to 5.40%, despite a surplus liquidity above INR 3 trillion, dealers said. On Wednesday, the RBI net absorbed INR 3.27 trillion, slightly higher than the INR 3.07 trillion absorbed on Tuesday.

Traders also likely paid fixed rate contracts to hedge a forward-rate agreement for long-term bonds, or were positioning for such a deal at the weekly gilt auction of INR 250 billion Friday. The government will sell a new seven-year paper worth INR 110 billion and 7.09%, 2074 bond worth INR 140 billion on Friday. 

"Market was biddish even though it (swaps) was getting offered in the morning," a dealer at a private sector bank said. "It's either because of a FRA (forward rate agreement) or because of an anticipation of a FRA tomorrow (Friday)." Another dealer expects around INR 15 billion of the 2074 gilt to be purchased for forward-rate agreements, and Separate Trading of Registered Interest and Principal of Securities by insurance companies and provident funds at the auction Friday, dealers said.

Despite triggers from the domestic and offshore fronts, the 5-year swap rate has been unable to break the 5.68-5.72% range, and traders betting on it surpassing the range had to reposition, dealers said. Some traders and corporate entities utilised the range to pay on the lower end and receive fixed rate contracts when it touched the higher end, restricting its movement, dealers said.  

OUTLOOK
Friday, swap rates are likely to take cues from the overnight movement in US Treasury yields after the release of weekly jobless claims data in the US. Swap traders will also closely track the movement of gilt yields after the results of the auction of gilts worth INR 250 billion, especially for the cut-off on the long-term paper. Demand for the bond for forward rate agreements might push up swap rates as banks would want to hedge their agreements with insurers, dealers said. 

Swap traders will also track developments in US-India trade talks and the negotiations between the US and 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 in the rupee against the dollar, dealers said.

On the domestic front, traders will watch for announcements of 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. 

Traders also await with interest the development of a collateralised money market benchmark. Financial Benchmarks India Ltd. published the new benchmark Secured Overnight Rupee Rate for the first time Monday, and it was set at 5.16%, below the standing deposit facility rate. 

The one-year swap rate is seen in the range of 5.46-5.60% Friday. The five-year contract is seen at 5.62-5.78%.

End

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

Edited by Saji George Titus

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