India IRS Review
Steady as FOMC outcome, Trump tariff announcement priced in
This story was originally published at 19:43 IST on 31 July 2025
Register to read our real-time news.Informist, Thursday, Jul. 31, 2025
By Cassandra Carvalho
MUMBAI – Overnight indexed swap rates ended steady Thursday after a choppy trading session due to lack of strong cues on interest rates. Earlier in the day, swap rates rose due to a sharp fall in the rupee against the dollar after US President Donald Trump Wednesday announced that the US would impose 25% tariffs on Indian goods shipped to the country, along with an additional penalty, from Friday. Strong receiving from both offshore and onshore traders offset the rise in the second half of trade, dealers said.
The one-year swap rate ended at 5.51%, flat from Wednesday's close. The five-year swap rate ended at 5.73%, also flat against the previous day's close. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 307.45 billion, higher than INR 240.70 billion Wednesday.
The rupee fell to a low of 87.74 a dollar in early trade, but recovered slightly likely due to dollar sales by some banks for the RBI. Tracking this, swap rates gave up early gains. Some of the initial panic after Trump's comments ebbed since several traders believe that a US-India trade deal is in the works and that the announcement was tactic to seal a deal quicker. Some traders said the US tariff would hit growth more than inflation in India, which could strengthen the case for rate cuts in India. Traders will now focus on the MPC meeting outcome next week.
"5.77% (on the 5-year swap rates) is a good level to receive... 5.76%-5.77% level, if it goes there," a trader at a primary dealership said. "We've seen market go to 5.74%-5.75% yesterday (Wednesday) so one basis here and there, the risk reward is good to receive."
The outcome of the US Federal Open Market Committee's meeting was largely along expected lines, dealers said. The FOMC Wednesday left the federal funds target rate range unchanged at 4.25-4.50% for the fifth consecutive meeting. However, two officials--Michelle W. Bowman and Christopher J. Waller--voted in favour of a 25-basis-point rate cut. US yields rose slightly after US Federal Reserve Chair Jerome Powell held the suspense on a rate cut in Setpember. At 1700 IST, the CME FedWatch tool showed that Fed fund futures reflected a 39% probability of a 25-bps-rate cut in the FOMC's September meeting, down from 63% a day ago. Economic data in the US also indicated strength in the US economy. The yield on the benchmark 10-year US Treasury note was 4.35% at 1700 IST, little changed from 4.34% at the same time Wednesday.
"OIS is having a receiving interest because one of the reasons is US (Treasury yields) is down (little changed post FOMC despite paring of rate cut bets) plus the tariff imposement by Trump led to belief in the market that growth may be fragile and that may prompt RBI to cut rates in the coming policy," a dealer at a private sector bank said.
A foreign hedge fund continued to receive fixed rate contracts on bets of a quicker rate cut cycle in both India and the US, for the third consecutive day, dealers said. Traders also traded bond swaps by buying long-term gilts and paying fixed rate contracts in the 2-year and 5-year swap rates to hedge the purchase, dealers said. The two-year swap rate was a lucrative tenure to receive, dealers said.
OUTLOOK
On Friday, overnight indexed swap rates may track the movement in US Treasury yields after the release of weekly jobless claims in the US. Swaps may also track the movement of crude oil prices and gilt yields. Traders await non-farm payrolls data in the US, due post market hours Friday, along with further clarity on US President Donald Trump's tariff policy on Indian goods. Swaps may also take cues from the movement of the rupee against the dollar.
Traders are now mainly focussed on the MPC meeting outcome, dealers said. While traders do not expect a rate cut next week, they will track any indications of further rate cuts. A few dealers expect that the RBI's CPI inflation forecasts could be lowered by 5-10 basis points. Traders also await the revised liquidity management framework, expected at the MPC meeting outcome.
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% Friday. The five-year contract is seen at 5.62-5.78%.
At 1700 IST | WEDNESDAY | |
1-year OIS | 5.51% | 5.51% |
2-year OIS | 5.47% | 5.48% |
5-year OIS | 5.73% | 5.73% |
2-year MIFOR | 5.99% | 5.99% |
5-year MIFOR | 6.20% | 6.20% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Akul Nishant Akhoury
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