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Informist, Thursday, Jul. 24, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates inched higher Thursday as US Treasury yields rose in the latter half of Indian market hours. However, volumes were dull as traders awaited fresh cues on interest rate movements in India and the US, dealers said.

The one-year swap rate ended at 5.50%, against 5.49% Wednesday. The five-year swap rate ended at 5.69% from 5.67% the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 244.75 billion, lower than INR 390.50 billion Wednesday.

The yield on the 10-year US Treasury note rose to 4.41% from 4.36% at 1700 IST Wednesday, with traders paying fixed rates as the benchmark US yield topped 4.40%. The US Federal Reserve is not expected to cut rates at its upcoming meeting at the end of July, though hopes of a 25-basis-point rate cut in September persist.

Monetary policy considerations have been complicated by fears that US President Donald Trump may fire Fed Chair Jerome Powell. The president's scheduled visit to the central bank Thursday was a reason for caution for traders. US yields also rose ahead of the Flash Purchasing Managers' Index data for July and weekly unemployment claims, scheduled after Indian market hours.

"Some offshore flows were there, but nothing in size that would move the market," a dealer at a primary dealership said. "It seems like traders are content playing within this range since there is nothing fresh on rates coming immediately."

Data released Thursday showed India's private-sector activity expanded at a slower pace in July compared to the previous month, but remained robust with the HSBC Flash Composite Purchasing Managers' Index at 60.7, compared with 61.0 in June. However, dealers said the purchasing managers' index data for India did not influence their view on domestic rate cuts.

Swap rates are expected to slump 10-12 bps if the Reserve Bank of India's Monetary Policy Committee cuts the repo rate in August. Some traders expect a rate cut next month, especially those from foreign banks. Swaps have not priced in a rate cut completely yet as most of the market remains sceptical, even as India's CPI inflation for June fell to a 77-month low of 2.10% and is expected to print below 2% in July, below the RBI's target band, dealers said.

Meanwhile, volatility and volumes on short-term swap rates decreased sharply from Wednesday. A rise in the overnight Mumbai Interbank Offered Rate--the floating leg of the OIS contract--to above the marginal standing facility rate of 5.75% Wednesday had led to a sharp rise in swap rates maturing in up to one year. The RBI conducted a variable rate repo auction for INR 500.00 billion on both Wednesday and Thursday, easing the paying pressure and leading to a lack of activity Thursday, dealers said. The weighted average rates in the call and triparty repo market both eased below the repo rate Thursday, and the overnight MIBOR was set at 5.63%, from 5.82% the previous day.

"There are no opportunities to really position heavily, everything seems to be in balance and fairly valued," a dealer at a private-sector bank said. "Corporate activity for hedging is also not really there. Even MIBOR worries have died down because the RBI has been relatively timely in giving banks cash."

OUTLOOK
On Friday, swaps may track the overnight movement of US Treasury yields after the release of weekly unemployment claims and purchasing managers' index data, dealers said. In data released at 1800 IST, US weekly jobless claims for the week ended Saturday fell to 217,000, down from 221,000 and lower than a consensus of 227,000 from The Wall Street Journal. 

Traders don't see any significant cues on domestic interest rates before the RBI's rate-setting panel's next meeting in early August. They may take cues from the movement in overnight MIBOR, which is expected to subside to 5.30-5.35% in the next few days from 5.63% Thursday, dealers said.

Meanwhile, the weekly gilts auction Friday is unlikely to have an impact on swap rates as there are no long-term bonds on offer, dealers said. Bond forwards and forward-rate agreements for gilts maturing in 30-50 years at auction typically push up two- and five-year swap rates.

Traders await the outcome of the US Federal Open Market Committee's meeting next week. They expect the FOMC to hold rates at this meeting. Some believe 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 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, dealers said. 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 Rajeev Pai

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