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Informist, Monday, Jul. 14, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates maturing in more than a year rose Monday after core CPI inflation for June was 4.4%, the highest since September 2023, even though traders had expected core CPI to be on the higher side due to a recent surge in gold prices, dealers said. The rise in long-term swap rates was aided by a rise in US Treasury yields over the weekend but short-term swap rates were down earlier in the day tracking a fall in the overnight Mumbai Interbank Offered Rate--the floating leg of the OIS contract.

The one-year swap rate ended at 5.54%, unchanged from Friday. The five-year swap rate ended at 5.74%, from 5.70% Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 257.80 billion, lower than INR 369.60 billion Friday.

Headline CPI inflation for June, published at 1600 IST, was lower than expected, at 2.10%, the lowest since January 2019. Traders had expected a print between 2.2% and 2.4%, while an Informist poll of 16 economists estimated the data at 2.3%. However, swaps reversed the temporary fall in a knee-jerk reaction after core inflation was 4.4%, dealers said. 

"This (the CPI) has not changed the rate view," a dealer at a private sector bank said. "A core CPI above 4% is a concern. But now we'll be looking at GDP more closely." After the data released today, India's Apr-Jun average CPI inflation is 2.7%, lower than 2.9% forecast by the Reserve Bank of India. 

Swap rates opened higher in a thin trade tracking a rise in US Treasury yields, dealers said. The yield on the benchmark 10-year US Treasury note was 4.43% at 1700 IST, up from 4.41% at 0900 IST and 4.37% at 1700 IST Friday. US yields rose after US President Donald Trump announced fresh tariffs on the Eurozone and Mexico. On Saturday, President Trump announced that starting Aug. 1, the US will implement a 30% tariff on products imported from the European Union and Mexico. 

"US yield is always going high, it has broken some technical level of 4.40%, if it sustains above here then we can see it going to 4.60%," a dealer at another private sector bank said. "Paying wil also continue if that happens." Brent crude oil futures for September delivery also rose above $70 per barrel, pushing up swap rates, dealers said.

The 5-year swap rate rose 4 basis points to break the key 5.72% level and end at a three-week high of 5.74%. Earlier in the day, offshore traders likely paid fixed rate contracts in the 5-year swap rate, dealers said. On the upside, the 5-year is seen rising to the next technical level of 5.78%, dealers said. Traders also hedged their bond forward-rate agreements with insurance companies by paying fixed-rate contracts in long-term swaps.  

"Only offshore would want to pay at higher levels," a trader at a primary dealership said. "Our onshore participants and even our domestic foreign banks prefer receiving at these levels (above 5.70% on the 5-year swap). All these days we've had so much negativity domestically but 5-year still didn't break 5.72%." 

However, short-term swap rates opened lower tracking a fall in the MIBOR rate. The MIBOR was fixed at 5.38% Monday, down from 5.51% Friday, as overnight borrowing rates eased due to surplus liquidity in the banking system. At 1700 IST, the weighted average call rate was 5.31% Monday, down from 5.45% Friday, while the weighted average triparty repo rate was 5.19%, down from 5.30% Friday. On Sunday, the RBI net absorbed INR 2.94 trillion, slightly lower than the INR 3.32 trillion Friday.

Swap rates eased around midday after the WPI inflation data was released. Traders awaited India CPI inflation for June after WPI inflation for June was unexpectedly in the negative zone for the first time in 20 months. Data released by the commerce ministry Monday showed WPI inflation fell to (-)0.13% in June from 0.39% in May. According to an Informist poll, WPI inflation was seen rising to 0.7% in June.   

OUTLOOK
On Tuesday, swaps may track any announcement by the RBI on variable rate reverse repo auctions. Traders expect either an overnight or 2-day VRRR to be announced post market hours Monday or Tuesday, for around INR 500 billion to INR 1 trillion. 

Swaps may also take cues from the movement in US Treasury yields, and comments from US President Donald Trump. 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 closely track overnight borrowing rates. The overnight MIBOR fixing will also lend cues after the initial trading hours. Swaps may track gilt yields, especially if traders hedge their bond forward-rate agreements with insurance companies. 

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 last week. The one-year swap rate is seen in the range of 5.46-5.60% Tuesday. 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 Akul Nishant Akhoury

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