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Informist, Friday, Jul. 18, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates maturing in a year or more ended down Friday as traders unwound paid fixed-rate contracts tracking a slight fall in US Treasury yields, dealers said. Swaps maturing in less than a year ended slightly higher after the Reserve Bank of India held a variable rate reverse repo auction for a larger-than-expected size.

The one-year swap rate ended at 5.50%, slightly down from 5.51% Thursday. The five-year swap rate ended at 5.70%, down from 5.73% at Thursday's close. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 180.70 billion, slightly higher than INR 164.80 billion Thursday.

Swaps opened lower Friday, tracking a fall in US Treasury yields. The yield on the 10-year benchmark US Treasury note was 4.44% at 1700 IST, down from 4.47% at the same time Thursday. US yields eased as fears of US Federal Reserve Chair Jerome Powell being fired by US President Donald Trump ebbed. Offshore traders likely received fixed rate contracts. The non-deliverable five-year OIS rate was around 1-2 basis points lower than the 5-year swap.

"In the daily chart, the (10-year) US yield bounced back strongly from 4.50%, which was a bullish sign and OIS moved lower," a dealer at a primary dealership said. "We also heard some offshore flows. Also, there are not a lot of fresh paying positions above 6.72% because of the negative carry."

Bets of a quicker rate cut cycle have increased after a softer-than-expected CPI inflation print for June, dealers said. Some traders received fixed rate contracts on rate cut bets. Some traders also bet on a rate cut at the RBI's Monetary Policy Committee meeting in August. Speculation that the meeting could have a softer tone on easing policy is gaining traction among traders. Most traders, however, expect the next rate cut after June to be only in December.    

"There's receiving because the five-year (swap) is not breaking 5.72% level, so people are just cutting off their paid positions," a dealer at a private sector bank said. 

Short-term swap rates ended higher after the RBI held a seven-day variable rate reverse repo auction of INR 2 trillion Friday. Traders had expected an auction for Friday, to roll over the quantum at previous auctions which are due for reversal Friday. However, traders had expected a size of INR 1.00 trillion to INR 1.50 trillion, due to outflows for goods and service tax payments starting Monday.

Traders had expected that the auction would not be fully subscribed, but the RBI took offers worth INR 2.00 trillion, and had received bids worth INR 2.08 trillion. Traders said that banks would prefer to lock in a higher return of 5.49% than lend at lower rates in the overnight markets. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract — was 5.39%, unchanged from Thursday.   

OUTLOOK
Swaps are not traded Saturday. On Monday, swaps may track the movement of US Treasury yields, dealers said. Traders expect the US Federal Open Market Committee to hold rates at its meeting at the end of this month, and some traders expect the RBI's Monetary Policy Committee to not cut rates further until the FOMC does, to protect the interest rate differential between the two countries. Traders will closely track any comments from US President Donald Trump on the US Federal Reserve Chair Powell. 

On the domestic front, traders will track overnight borrowing rates and the overnight MIBOR. Traders do not expect the RBI to announce any further VRRR auctions until coming Friday, due to GST outflows starting Monday. Traders are now pricing in an overnight call money rate of 5.40-5.50%, especially after RBI Governor Sanjay Malhotra said that the call money rate should be closer to the repo rate. Swaps may track the movement in gilt yields.

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% Monday. 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 

End

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

Edited by Tanima Banerjee

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