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Informist, Friday, Jul. 25, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher Friday as traders pared back their bets on an August rate cut after Reserve Bank of India Governor Sanjay Malhotra's comments earlier in the day, dealers said. Some traders received fixed rates near the day's high at levels they considered lucrative should the Monetary Policy Committee cut rates later in the year. 

The one-year swap rate ended at 5.53%, against 5.50% Thursday. The five-year swap rate ended at 5.73% from 5.69% the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 350.25 billion, higher than INR 244.75 billion Thursday.

Malhotra's comments at an event early Friday did not suggest further rate cuts were imminent, dealers said. He said the RBI's rate-setting panel would look more to the outlook for the next six to 12 months than at current inflation and growth data to base its policy rate decisions. Some traders were expecting a rate cut in August with inflation data for the June quarter, and likely for July as well, printing below the RBI's forecasts.

"Talk and positioning has been growing of an August rate cut," a dealer at a primary dealership said. "Now that we are on the cusp of policy, people were expecting the governor to give some softer guidance, but he only repeated what he has been saying over the past month. That disappointed some people."

Swap rates were expected to slump 10-12 bps if the RBI's Monetary Policy Committee cut the repo rate in August. Traders from foreign and private sector banks had been building positions on such an eventually, but swap rates had not priced in a rate cut completely as most of the market remained sceptical, dealers said. 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, the RBI's forecast for Jan-Mar inflation is 4.4%. This would put the real interest rate – the nominal repo rate of 5.50% net of expected inflation – at 1.10%.

"...we expect them (real policy rate) to correct lower to c.100bps starting in Q4-FY26 (Jan-Mar) as inflation rises towards 4.5% from below 3%," Anubhuti Sahay, head of India Economic Research, Standard Chartered, said in a note Friday. The note called for an extended pause on the repo rate because the detrimental impact of high real rates on growth is likely to be limited this time against the 2014-2019 period when real rates were elevated amid neutral to tight liquidity and growth headwinds from positive policy reforms, Sahay said.

Offshore cues, including US Treasury yields, had limited impact on swap rates Friday as traders reassessed the domestic rate trajectory. However, some traders paid fixed rates in the five-year swap as the 10-year US Treasury yield was trading around 4.40%, above its 200-day moving average, dealers said. Some dealers preferred paying fixed rates in the two-to-five-year segment expecting the policy rate cycle to reverse in that period and the MPC once again looking to tighten monetary policy.

Meanwhile, swap rates in three-month to one-year rose due to the change in the rate cut view, but the gains were capped as some traders still hoped for rate cuts at subsequent MPC meetings. Bank of Baroda Friday said it still expects a 25-bps rate cut after September. Some traders expect the MPC to take the next action on rates after the US Federal Open Market Committee's September meeting, where it is expected to cut rates, and once the clarity of the monsoon in India and its impact on food prices in the winter months firms up.

"There is no money to be made in the one-year, we are at fair pricing where you now have a risk premium to deal with liquidity fluctuations," a dealer at a private sector bank said. "So I am not receiving. But at the same time, you have the overhang of a potential rate cut still in the domestic market, that is not going to go away and rates are not going to move higher."

OUTLOOK
Swaps are not traded Saturday. On Monday, they may track the movement of US Treasury yields. Traders don't see any significant cues on domestic interest rates before the RBI's rate-setting panel's next meeting in early August. Near-term swap rates may take cues from the movement in overnight MIBOR, which is expected to remain in the 5.30-5.40% band, dealers said.

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.

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 has announced deals with multiple countries before the Aug. 1 deadline, 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 Tanima Banerjee

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