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Informist, Wednesday, Jul. 16, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady in thin trade due to a lack of significant domestic triggers, dealers said. Swap rates opened higher, tracking an overnight rise in US Treasury yields after the US headline inflation data indicated a possible impact of US President Donald Trump's tariff policy, but erased gains due to a soft CPI inflation print in India. 

The one-year swap rate ended at 5.52%, down from 5.53% Tuesday. The five-year swap rate ended at 5.73%, unchanged from Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 164.80 billion, sharply lower than INR 458.25 billion Tuesday.

The yield on the 10-year US Treasury note rose to 4.49% at 1700 IST, the highest in more than a month, from 4.43% at the same time Tuesday. US CPI inflation for June, published post-market hours Tuesday, rose 2.7% on year, which was in line with consensus estimates. However, the data indicated a possible impact from Trump's tariff policies, and the odds of the US Federal Open Market Committee cutting rates in September have decreased. At 1700 IST, the CME FedWatch tool indicated that Fed fund futures reflected a 46% probability of the FOMC holding rates at its September meeting, up from 30% the previous week. The FOMC is widely expected to hold rates at its meeting at the end of July. 

The 5-year swap rate opened at 5.77%, sharply up from Tuesday's close, and neared the key technical level of 5.78%. However, it erased most gains almost immediately. Traders dismissed the rise as a one-off trade, and swap rates traded within a narrow band for the remainder of the day. 

"That (the sharp rise in 5-year at open) was just one trade," a trader at a primary dealership said. "Someone must've chickened out and shed all (received) positions. Immediately after that, all the offers were at 5.73% and 5.74% levels."

Domestic traders largely ignored the rise in US yields, as fears of the repercussions of US President Donald Trump's tariff policy on the Indian economy have abated, especially following a soft CPI print in June. Data released on Monday showed that India's CPI inflation in June fell to a six-year low of 2.1%. Reserve Bank of India Governor Sanjay Malhotra, in interactions with the media, has indicated that the RBI's Monetary Policy Committee could cut rates further if growth weakens or inflation moderates. CPI inflation averaged 2.7% in Apr-June, 20 basis points lower than the RBI's forecast of 2.9%. Traders now see a cut in the repo rate in December or early next calendar year.

Traders preferred receiving fixed-rate contracts at the 5.70-5.78% level on the 5-year swap rate. Offshore traders were also likely receiving fixed-rate contracts, dealers said. "These levels, anything above 5.70% is very good to receive, so we're not going to break 5.78% unless US (10-year) yield rises above 4.50%," a dealer at a private sector bank said.

Swap rates maturing in a year or less ended slightly lower due to rate cut expectations and a fall in the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract. The MIBOR fell to 5.40%, from 5.44% Tuesday. Swap traders are now pricing in an overnight call money rate of 5.40-5.50%, after the RBI governor in an interview on Tuesday said the central bank would prefer to keep the overnight call money rate closer to the repo rate. 

OUTLOOK
On Thursday, swaps may track the movement of US Treasury yields after the release of US producer price index data for June, due at 1800 IST, dealers said. The index is expected to rise 0.2%, according to consensus estimates from The Wall Street Journal. The data is closely tracked for cues on the rate trajectory in the US, especially after Tuesday's CPI inflation data dampened hopes of a rate cut by the FOMC in September.

Traders will closely track overnight borrowing rates and the MIBOR, as well as announcements by the RBI on variable-rate reverse repo auctions, if any. Traders are now pricing in an overnight call money rate of 5.40-5.50%, especially after the RBI governor said that the call money rate should be closer to the repo rate. Swaps may track the movement in gilt yields. Two- and five-year swaps may rise if banks 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 thereof, will be seen on swaps through the movement in the rupee against the dollar, dealers said.

Traders also await the development of a collateralised money market benchmark with interest. 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% Thursday. 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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