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Informist, Thursday, Jul. 17, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady Thursday, with a downward bias, as US Treasury yields eased intraday, dealers said. The volumes were thin due to a lack of significant domestic triggers, dealers said. 

The one-year swap rate ended at 5.51%, down from 5.52% Wednesday. The five-year swap rate ended at 5.73%, unchanged from Wednesday and Tuesday's close. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 161.80 billion, almost the same as INR 164.80 billion Wednesday.

Swap rates opened steady due to a lack of domestic triggers on rates, inflation and growth, dealers said. However, some traders preferred receiving fixed-rate contracts on the expectation of a rate cut in December or early next calendar year. Some traders even expect a cut in the repo rate by the Reserve Bank of India's Monetary Policy Committee in August, following a soft CPI print for June. India's CPI inflation for June fell to a six-year low of 2.10%.

"I think it's good to receive (fixed rate contracts) on the 2-year (swap rate) because there is an expectation of a rate cut in December, and 1x2 (spread between 1-year and 2-year swaps) is flat, so you're making good money there," a dealer at a private sector bank said.  

The slight fall in swap rates was aided by an intraday fall in US yields, dealers said. The yield on the 10-year benchmark US Treasury briefly fell to 4.46%. At 1700 IST, the yield on the US Treasury was 4.47% compared with 4.49% at the same time Wednesday. Swaps have not priced in the rise in the 10-year US yield near the key technical of 4.50%, dealers said.

Traders expect US yields to fall, or at least for the US yield curve to steepen, due to backlash from US President Donald Trump against the US Federal Open Market Committee and US Federal Reserve Chair Jerome Powell for not cutting rates sooner. Recent media reports indicate that Trump could attempt to fire Powell, and rumours have it that Powell could resign, even before the FOMC meeting at the end of the month, dealers said. While concerns about the independence of the US Federal Reserve could keep long-term US yields at the higher end, a quicker rate cut cycle could bring short-term US yields down, dealers said.   

The non-deliverable OIS rates were around one basis point lower than swaps. However, offshore flows in swaps were unlikely, dealers said, as trade volumes were low, although foreign portfolio investors were likely purchasing gilts during the day. The fall in swap rates was limited due to the rupee's depreciation against the dollar during the day, dealers said. The rupee ended at 86.0750 against the dollar on Thursday, as against 85.9400 on Wednesday. 

OUTLOOK
On Friday, swaps may track the movement of US Treasury yields after the release of weekly jobless claims for the week ended Saturday, dealers said. Jobless claims are seen at 234,000, higher than 227,000 in the previous week, 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 US CPI inflation data dampened hopes of a rate cut by the FOMC in September. Traders expect the FOMC to hold rates at its meeting at the end of this month. Traders will closely track any comments from US President Donald Trump on the US Federal Reserve chair. 

On the domestic front, traders will track overnight borrowing rates and the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract. Traders expect the RBI to announce a variable-rate reverse repo auction of INR 1 trillion for Friday, to roll over the quantum from previous auctions, which is due to be reversed Friday. Even if the VRRR size exceeds INR 1 trillion, it is unlikely to be subscribed for more than that due to outflows of goods and service tax starting Monday. 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 reflected in swaps through the movement of the rupee against the dollar, dealers said. 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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