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Informist, Monday, Jul. 21, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended a tad lower, tracking a fall in US Treasury yields during the day, dealers said. Swap rates maturing in less than a year rose slightly in early trade, tracking a rise in the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract.

The one-year swap rate ended at 5.48%, slightly down from 5.50% Friday. The five-year swap rate ended at 5.68%, down from 5.70% at Friday's close. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 316.70 billion, much higher than INR 180.70 billion Friday.

The yield on the benchmark 10-year US Treasury note was 4.37% at 1700 IST, down from 4.42% at 0900 IST and 4.44% at 1700 IST Friday. Subsequently, long-term swap rates opened lower, as traders received fixed-rate contracts. Offshore flows were likely, though notional traded volumes were too low to be of significance, dealers said. 

US yields eased after US Federal Reserve Governor Christopher Waller called for a rate cut at the US Federal Open Market Committee's meeting at the end of this month. The official has also emerged as the leading internal candidate to take over the position of US Federal Reserve chair from current head Jerome Powell. Traders speculate that either US President Donald Trump could fire Powell for not cutting rates sooner, or that Powell could resign after the FOMC's July meeting.

Traders expect the FOMC to hold interest rates at its July meeting, but hope of a cut in September are increasing due to pressure from Trump to lower rates. A sooner rate-cut cycle in the US could increase chances of a similar acceleration in the rate-cut cycle in India.  

"The RBI ('s Monetary Policy Committee) only has a window to cut rates till December, because after that due to base effect I think FY27 CPI (inflation) is projected above 4%," a dealer at a private sector bank said. "Swaps are only slightly pricing in another cut now, depends on the Fed (US FOMC) also, if there's a cut there."

At the June policy outcome, RBI Governor Sanjay Malhotra said the central bank expects CPI inflation in 2026-27 (Apr-Mar) at 4.5%. 

On the domestic front, some traders see MIBOR rising in the near term, due to the RBI's liquidity management operations, thereby seeing current levels in swaps as good to pay fixed rate contracts. The weighted average call money rate was 5.48% as of 1730 IST Monday, from 5.00% the previous session, due to increased demand for funds amid outflows of around INR 1.75 trillion for goods and services tax starting Monday. 

In a release Friday, the Financial Benchmarks India Ltd. said it will compute the overnight MIBOR used in call market trades for three hours, from 0900-1200 IST instead of the current 0900-1000 IST. The overnight rate will be published at 1245 IST instead of current 1045 IST, starting Aug. 4. Swap rates could move lower in the near-term due to this shift, though traders are yet to determine the exact impact, they said. Nonetheless, traders expect that the central bank will reduce dependence on the MIBOR and shift to the Secured Overnight Rupee Rate benchmark, further clarity of which is awaited. Traders played on spreads between swap rates and other rate instruments during the day, due to lack of fresh triggers, dealers said. 

"I don't see any impact of this (the new computational method). It's just for polling right", a dealer at another private sector bank said. "No one is also talking about it as such, maybe later on we'll see some movement, but for now there are no cues, there's nothing happening in OIS."

OUTLOOK
On Tuesday, swaps may track the overnight movement of US Treasury yields, dealers said. The US Federal Reserve Board of Governors will have a closed meeting at 2100 IST. 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 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 variable rate reverse repo auctions until Friday, and 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 5.42-5.55% 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 Deepshikha Bhardwaj

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