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Informist, Wednesday, Jul. 23, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended slightly lower after the Reserve Bank of India held a variable rate repo auction Wednesday for the first time since Jun. 10, which cooled initially high money market rates. A slight fall in US Treasury yields overnight also lent a downward bias to swaps, dealers said. 

The one-year swap rate ended at 5.49%, a tad down from 5.50% Tuesday. The five-year swap rate ended at 5.67% from 5.68% Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 390.50 billion, higher than INR 258.30 billion Tuesday.

The RBI held a VRR auction for INR 500 billion at 1315-1345 IST, which was fully subscribed. Overnight money market rose above the Marginal Standing Facility rate Wednesday, the upper limit of the central bank's liquidity adjustment corridor, owing to pressure on systemic liquidity on outflows for goods and services tax. Traders estimate the outflows at INR 1.75 trillion to INR 2.00 trillion this week. However, some traders expect that the outflows were higher than estimated, which is why overnight borrowing rates shot up this week. The weighted average call money rate rose to 5.82% at 0930 IST from 5.62% Tuesday. The weighted average triparty repo rate also rose to 5.73% from 5.69% Monday.

"I think the RBI has made it clear that RBI wants rates within the (LAF) corridor, not above nor below," a dealer at a private sector bank said. "The governor has also said, we want the call rates at repo and we've seen that today (Wednesday). But I think this VRR will only be for this week because of the GST outflows."

Borrowing rates cooled slightly after the VRR. The weighted average call money rate fell to 5.73% at 1730 IST. The weighted average triparty repo rate fell to 5.72%. Subsequently, the one-month swap rate fell to 5.44% from 5.48% at open, and 5.46% at Tuesday's close. 

While most traders were taken by surprise by the VRR announcement, some traders had expected it after seeing the rise in borrowing rate Tuesday and Wednesday, though they had expected the auction earlier in the day. Traders expect another VRR of the same quantum Thursday but expect the central bank to continue with its variable rate reverse repo operations Friday. 

While the VRR brought a temporary relief to traders, they are looking for more significant cues on rate cuts, without which swaps are unlikely to fall further. If the 5-year swap rate falls below the key 5.65% level it could decline till 5.61-5.62%. But swaps may dip 10 to 12 basis points if the RBI's Monetary Policy Committee cuts the repo rate in August. Some traders, especially those from foreign banks, expect a rate cut next month, but most do not expect a cut and swaps have not priced it in completely yet, they said. Scope of one more additional cut other than the one expected could lead to swap rates falling sharply.   

"The main question right now is RBI cutting twice?" a dealer at another private sector bank said. "People are already expecting one cut, whether it's in August or December. But gilts won't move with one more cut because we had priced in a 5.20% (call money market rate), though swaps may fall more. We will only see a rally if RBI indicates there is scope for one more cut which will take repo to 5.00%."

Traders continued to favour receiving the two-year swap rate on hope of a rate cut, as it is around the same level as the one-year swap rate, thus offering better returns. 

On the global front, US yields fell as US President Donald Trump announced trade deals with two trade partners before the Aug. 1 deadline for tariffs. Trump announced a pact with Japan and with the Philippines. US Treasury Secretary Scott Bessent said more such deals were coming. The yield on the benchmark 10-year US Treasury note was 4.36% at 1700 IST, down from 4.40% at the same time Tuesday.

OUTLOOK
Thursday, swaps may track the overnight movement of US Treasury yields, dealers said. 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 VRR auction Thursday owing to pressure on systemic liquidity on outflows for goods and services tax. Swaps may track the movement in gilt yields.

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 while some 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 comment from Trump on US Federal Reserve Chair Jerome Powell.

Swap traders will also track developments in the India-US trade talks and the negotiations between the US and other trading partners, especially after Trump announced deals with two countries, according to dealers. The one-year swap rate is seen in the range of 5.42-5.55% 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 Subhojit Sarkar

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