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Informist, Tuesday, Jul. 15, 2025

By Cassandra Carvalho
 

MUMBAI – Overnight indexed swap rates ended steady Tuesday after comments from Reserve Bank of India Governor Sanjay Malhotra failed to improve market sentiment and provide cues on further cuts in repo rate, dealers said. Traders now await US CPI inflation data for June, due at 1800 IST, for cues on the rate trajectory in the US. 

The one-year swap rate ended at 5.53%, from 5.54% Monday. The five-year swap rate ended at 5.73%, from 5.74% Monday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 458.25 billion, sharply higher than INR 257.80 billion Monday.

In an interview with business news channel CNBC-TV18 during market hours, Malhotra said the RBI's Monetary Policy Committee was dictated more by the outlook on CPI inflation and not the current inflation data. This was a disappointment to some traders who had received fixed-rate contracts earlier in the day, in anticipation that the governor would indicate a quicker rate cut cycle after a benign CPI inflation print for June. 

"I wasn't enthused by it (Malhotra's interview) at all," a trader at a private sector bank said. "He basically said, let's not get ahead of ourselves. Nothing positive in it."  

CPI inflation for June, published Monday, fell to a six-year low of 2.10% from 2.82% in May, and lower than the Informist poll estimate of 2.3%. However, traders' rate views were little changed post the data. Some traders were hoping for a print below 2% for a rethink on rate cuts. Instead, core CPI inflation rose to a 21-month high of 4.4%, which led some traders to unwind received bets after the data, dealers said. Traders expect the RBI's Monetary Policy Committee to next cut rates either in December or in the next calendar year.  

Traders hoped the governor's comments would offer some solace and clarity after confusion in the rates market regarding the central bank's policy on liquidity management and rates. After the RBI conducted several variable-rate reverse repo auctions since mid-June, traders were of the view that the central bank would prefer to keep overnight money market rates anchored between the Standing Deposit Facility and the policy repo rate of 5.50%. Malhotra confirmed this view, saying that the central bank would ideally prefer the overnight call money rate to be near the policy rate.

After the RBI held a INR-1-trillion, three-day VRRR auction Tuesday, the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – was fixed at 5.44%, 6 basis points higher than Monday. Short-term swap rates opened higher, and traders expect the 5-year swap rate to hit the next technical level of 5.78-5.80% in the near term, if such liquidity-draining measures continue, dealers said. However, swap rates tended towards a receiving bias for most of the day in anticipation of a pro-rate cut outlook from the governor.

"We can definitely hit 5.78% (on the 5-year swap)," a trader at a primary dealership said. "But people do not want to pay at these levels, at least with overall UST (US Treasury) levels right now and no geopolitical fear." The yield on the benchmark 10-year US Treasury note was at 4.43%, unchanged from the same time Monday.

OUTLOOK
On Wednesday, swaps may track the movement of US Treasury yields after the release of US CPI data for June, dealers said. Data released after market hours showed that the US CPI inflation was 2.7% on year in June, in line with expectations. The data is closely tracked for cues on the outcome of the US Federal Open Market Committee's meeting at the end of this month, though most traders do not expect a rate cut.

Traders will closely track overnight borrowing rates and the MIBOR, and announcements by the RBI on variable-rate reverse repo auctions, if any. Traders are now pricing in an overnight call money rate of 5.45%, especially after Malhotra said the call money should be closer to repo. Swaps may track gilt yields, especially if traders hedge their bond forward-rate agreements with insurance companies. 

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 it, will be seen on swaps through the movement in the rupee against the dollar, dealers said.

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% Wednesday. 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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