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Informist, Monday, Jul. 28, 2025

By Cassandra Carvalho 

MUMBAI – Overnight indexed swap rates rose slightly Monday, tracking a gain in gilt yields, dealers said. However, the rise in swaps was limited as traders received fixed rates due to an intraday fall in US Treasury yields, dealers said. While gilt yields rose during the day, dealers said an upside in swap rates was limited, as the view on rate cuts was little changed from last week.     

The one-year swap rate ended at 5.55%, against 5.53% Friday. The five-year swap rate ended at 5.75%, the highest in more than a month, from 5.73% the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 286.15 billion, lower than INR 350.25 billion Friday. The yield on the benchmark 10-year US Treasury note was 4.41% at 1700 IST, but fell to 4.37% during the day, from 4.39% at the same time Friday.

Swap rates inched up Friday after Reserve Bank of India Governor Sanjay Malhotra said the Monetary Policy Committee would look more at the outlook for the next 6-12 months than at current inflation and growth data to base its policy rate decisions. Prior to the governor's remarks, some traders, especially offshore, had received fixed rate contracts on expectations of a rate cut in August on the back of soft inflation data. 

"Whatever change in rate view that happened, we saw that unwind on Friday," a dealer at a private sector bank said. "Now US yields are also two-three bps lower...I don't see us (the five-year swap rate) going near 5.78%."

While gilt yields rose Friday and Monday, the rise in swaps was subdued, since swaps were only slightly pricing in another rate cut earlier, dealers said. Swaps are currently not pricing in a cut, dealers said. However, dealers still see space for at least one more cut in the repo rate by December on the back of slowing economic growth and low inflation, which will also keep the rise in swap rates limited, dealers said.   

"I think there's a very limited upside in swaps because we're just waiting...eventually the softer growth and low CPI will show in the data," a dealer at another private sector bank said. "And your money market rates are also stable now."

Concerns on the liquidity front eased, dealers said, as borrowing rates cooled after shooting above the repo rate last week. The weighted average call rate was 5.36% at 1700 IST, from 5.39% Friday. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract was 5.40% Monday, from 5.44% Friday. Traders expect that central government's month-end spending will boost the surplus liquidity in the banking system. They now await the RBI's liquidity management framework, expected at the end of the month, for further clarity. Dealers expect the RBI to define the optimal level of liquidity in the banking system in the draft guidelines. 

OUTLOOK
On Tuesday, they may track the movement of US Treasury yields and gilts yields. Traders don't see any significant cues on domestic interest rates before the RBI's rate-setting panel's meeting next week. 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.

On the global front, traders await the outcome of the US Federal Open Market Committee's meeting Wednesday. They expect the FOMC to hold rates steady, but will keenly track commentary from US Federal Reserve officials, especially due to recent backlash from US President Donald Trump for not cutting rates sooner. 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.

Caution may limit volatility in swap rates due to a data-heavy week in the US. The US personal income and outlays for June is due Thursday, and the US employment report--which includes the crucial non-farm payrolls data--for July is due Friday. Trump's pause on 'reciprocal' tariffs also ends Friday. Some traders are skeptical about a trade deal between India and the US before the tariff deadline.   

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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