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Informist, Wednesday, Jul. 30, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended mixed Wednesday, with short-term swap rates falling, tracking a fall in US Treasury yields ahead of the US Federal Open Market Committee outcome, and longer-term swap rates ending steady as receiving bias was offset by a sharp fall in the rupee against the dollar and the rise in crude oil prices. 

The one-year swap rate ended at 5.51%, tad down from 5.52% Tuesday. The five-year swap rate ended at 5.73%, flat against the previous day's close. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 240.70 billion, lower than INR 313.05 billion Tuesday. 

Swaps opened lower, tracking an overnight fall in US Treasury yields ahead of the outcome of the US FOMC due late Wednesday. However, the sharp fall in the rupee against the dollar to a five-month low of 87.51 per dollar during the day led to onshore traders paying fixed rate contracts, dealers said. A rise in crude oil prices also aided the paying bias, dealers said. Crude oil prices inched up after US President Donald Trump once again threatened additional sanctions and tariffs on Russia, including sanctions on countries importing Russian oil, unless it agreed to a ceasefire with Ukraine within 10 days. Brent crude for September delivery was up at $72.00 a barrel at 1700 IST from $70.00 a barrel at the same time Tuesday.  

Some traders also paid fixed rates tracking a rise in gilt yields. Traders had also expected offshore flows to pull swaps down due to the fall in US yields, but flows were subdued due to Trump's tariff threats.   

"Today's (Wednesday's) fall in US yields was not meant (positive) for emerging markets because tariffs on large EMs (emerging markets) like India and China have led to demand for safe-haven US Treasuries," a dealer at a private sector bank said. 

Soft US yields and hopes of a softer commentary from US Federal Reserve Chair Jerome Powell at the FOMC outcome led to some traders receiving fixed rates, especially in the short-term swap rates, dealers said. 

The yield on the benchmark 10-year US Treasury note fell to 4.34% at 1700 IST from 4.40% at the same time Tuesday. 

Traders expect some FOMC committee members to vote for a rate cut, though a status quo on rates is expected as the consensus. Traders will also track a slew of US economic data during the week. "There is a foreign hedge fund that is taking a bullish punt on rate cuts both in the US and in India, which is receiving OIS," a trader at a primary dealership said. 

Some domestic traders say the Reserve Bank of India's Monetary Policy Committee will not cut rates further until the FOMC does, to protect the interest rate differential between the two countries. While traders expect a status quo on rates by the MPC next week, some expect the RBI's CPI inflation forecasts for Jul-Sept and Oct-Dec to be cut by 5 to 10 basis points. 

Traders also await the draft of the RBI's new liquidity management framework, which was expected by the end of July. However, a NDTV Profit report earlier in the day said the RBI will likely announce the framework at the outcome of the Monetary Policy Committee meeting next week.

Traders are awaiting clarity that the RBI will target the overnight weighted average call money rate for its liquidity management. Dealers expect the RBI to define the optimal level of liquidity in the banking system in the draft guidelines. Dealers speculated that the central bank could introduce either daily overnight VRRR and VRR auctions, or a fixed rate repo or reverse repo window system starting next week. 

OUTLOOK
On Thursday, overnight indexed swap rates may track the movement of US Treasury yields after the outcome of the US FOMC meeting. Swaps may also track the movement of crude oil prices and gilt yields. Traders will closely track the comments of US Federal Reserve Chair Jerome Powell on further scope for rate cuts, especially since trade deals between the US and its trade partners have cleared some of the uncertainty for US monetary policy, dealers said. 

Swaps may also take cues from the movement of the rupee against the dollar after US President Donald Trump said Washington will impose a 25% tariff on Indian goods, along with an additional penalty, from Friday.

On the liquidity front, traders have priced in overnight borrowing rates close to the repo, not below or above, and await the central bank's draft guidelines on the liquidity management framework. Near-term swap rates will track the movement of the overnight MIBOR.  

The one-year swap rate is seen in the range of 5.42-5.58% Thursday. The five-year contract is seen at 5.62-5.78%.

End

Edited by Saji George Titus

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