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Informist, Tuesday, Jul. 22, 2025

By Cassandra Carvalho and Srijita Bose

MUMBAI – Overnight indexed swap rates maturing in a year or less ended slightly higher tracking a rise in the overnight Mumbai Interbank Offer Rate, the floating leg of the OIS contract, dealers said. Longer-term swap rates ended steady as current levels were lucrative to receive fixed rate contracts, according to some traders who expect a quicker rate-cut cycle, which offset the upward bias from the rise in MIBOR.

The one-year swap rate ended at 5.50%, slightly up from 5.48% Monday. The five-year swap rate ended unchanged from Monday's close at 5.68%. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 258.30 billion, lower than INR 316.70 billion Monday.

Traders paid fixed rate contracts, especially in short-term swap rates, as the weighted average call money rate rose further this week to 5.63% at 1800 IST from 5.48% Monday. The weighted average triparty repo rate also rose, to 5.69% from 5.51% Monday. Subsequently, the MIBOR rose to 5.68% Tuesday from 5.52% Monday. Most domestic traders said they expect the MIBOR to rise further in the next few days, as outflows of INR 1.75 trillion-INR 2.00 trillion for goods and services tax are likely to keep overnight borrowing rates elevated in the near term. Based on this view, it was lucrative to pay fixed rates at current levels, dealers said. 

"On the one hand there are rate-cut expectations and US yields have also remained lower, but the call and TREPs (triparty repo) rates are only rising because of the GST outflows, so that is pushing short-term (swaps) up," a dealer at a private-sector bank said.

Foreign banks likely received fixed rate contracts in long-term swap rates. Foreign banks are betting on a cut in the repo rate at the Reserve Bank of India's Monetary Policy Committee meeting next month itself, dealers said. Traders from domestic banks do not expect a cut in the repo rate at least until October, they said. Additionally, current levels on the 10-year US Treasury yield gave some comfort to traders, dealers said. The yield on the 10-year benchmark US Treasury note was 4.40% at 1700 IST, up from 4.37% at the same time Monday, but below the key 4.50% level it neared last week. 

"These are good levels to receive if your view is of a rate cut, so some foreign banks may be receiving at these levels but not very aggressively," a dealer at a private-sector bank said. "But volumes are also low so traders are not taking very aggressive positions even if there is a view." The trader speculated that the RBI could conduct an overnight or two-day variable rate repo auction to bring down the overnight rates below or at par with repo.

Volumes were low, and hedging activity from corporations, institutions, and banks has decreased sharply as the current levels are not seen as appealing, dealers said.

OUTLOOK
Wednesday, swaps may track the overnight movement of US Treasury yields after the release of US economic data, dealers said. On the global front, traders await the outcome of the US Federal Open Market Committee's meeting at the end of the month. Traders expect the FOMC to hold rates at this meeting, and some traders expect that the RBI's rate-setting panel will not cut rates further until the FOMC does so, 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 Jerome 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 auction until Friday owing to pressure on systemic liquidity on outflows for goods and services tax. Swaps may track the movement in gilt yields.

Swap traders will also track developments in the India-US trade talks and the negotiations between the US and other trading partners, dealers said. The impact of a trade deal between India and the US, 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% 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 Rajeev Pai

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