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Informist, Friday, Aug. 1, 2025

 

By Cassandra Carvalho

 

MUMBAI – Overnight indexed swap rates ended steady in thin trade Friday due to caution ahead of the US employment report for July, dealers said. Data released after market hours showed non-farm payrolls in the US were 73,000 in July. Consensus estimates from The Wall Street Journal expected non-farm payrolls at 100,000, up from 147,000 in June. Unemployment rose to 4.2% in July from 4.1% the previous month, in line with expectations.

 

The one-year swap rate ended at 5.51%, flat from Thursday's close. The five-year swap rate ended at 5.72%, slightly lower than 5.73% the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 149.10 billion, much lower than INR 307.45 billion Thursday. The yield on the benchmark 10-year US Treasury note was 4.38% at 1700 IST, higher than 4.35% the same time Thursday.

 

Swap rates opened slightly lower as the rupee appreciated against the dollar, reversing early losses. The rupee ended at 87.5400 per dollar at 1530 IST from 87.5950 per dollar at the same time Thursday. Swap traders had expected that the worst was over for the rupee, after it depreciated to a record closing low Thursday.

 

However, lack of receiving by offshore participants, which had lent swaps a downward bias earlier in the week, limited a further fall in swaps. Instead, some onshore traders who had received fixed rate contracts earlier paid fixed rate contracts. Some traders also hedged their bond forward rate agreements by paying fixed rate contracts, dealers said.

 

At the weekly gilt auction of INR 320 billion, the government sold INR 160 billion of the 6.68%, 2040 bond and INR 160 billion of the 6.90%, 2065 bond. Traders said insurance companies and provident funds bought INR 20 billion to INR 30 billion of the 2065 bond for forward-rate agreements, though most said it was an unusually small quantum of purchases for these agreements. A trader said the purchases were as low as INR 5.00 billion to INR 10.00 billion. Traders also hedged their long-term bond purchases by paying fixed rates in long-term swap rates such as the two-year, five-year, and seven-year swap rates.

 

A rise in US yields also limited a fall in longer-tenure swap rates and traders were cautious in placing any aggressive bets ahead of the US jobs data, they said.

 

"The five-year OIS is not breaking any levels, both on the upside and the downside," a dealer at a private sector bank said. "It is just going to be in a range of 10 bps. On the downside, we've seen 5.67% is a tough level to break, both by past history and on the trend line also. On the upside its 5.86%-5.87% but it'll move only if there's another rate cut view (on the downside) or if our fiscal deficit worsens or if bond supply increases (on the upside)." 

 

The government's fiscal deficit for the first quarter of 2025-26 (Apr-Mar) was INR 2.807 trillion, more than double the deficit in the same period a year ago, data released Thursday by the Controller General of Accounts showed.

 

On the domestic front, traders were focussing on the three-day meeting of the Reserve Bank of India's Monetary Policy Committee starting Monday. Short-term swap rates fell slightly and were beginning to price in another cut in the repo rate. Most traders were not expecting another rate cut by the MPC after the jumbo rate cut in June, but after soft inflation data and fears of slowing growth due to US President Donald Trump's imposition of tariffs on India, traders said that another rate cut was on the cards though not next week. Some dealers have already priced in another cut and hope for indication of a third cut to position any further, they said. This led to a steepening of the swap rate curve and most traders preferred receiving the two-year swap rate. A few preferred receiving the five-year swap rate.

 

"The 2x5 spread is at a cyclical steepener," a dealer at a private sector bank said. "This 25 bps spread is not something we've ever crossed. So people would receive two-year, it's a slam dunk cut trade...while receiving the five-year is a blind receive." The spread between the two-year swap and the five-year swap rate has been around 25 basis points this week and neared this level once in mid-July. Prior to that, such a high spread was last seen in June 2022.

 

While traders do not expect a rate cut by the MPC next week, they will track any indications of further rate cuts from the tone of RBI Governor Sanjay Malhotra's speech and his usage of language, dealers said. A few dealers expect that the RBI's CPI inflation forecasts could be lowered by 5-10 basis points and some said GDP growth forecasts could also be lowered. Traders also await the revised liquidity management framework, expected at the MPC meeting outcome. 

 

OUTLOOK
Swaps are not traded Saturdays. On Monday, overnight indexed swap rates may track the movement of US Treasury yields after the US employment report. Swaps may also track the movement of the rupee against the dollar, crude oil prices, and government bond yields. Traders await further clarity on Trump's tariff policy on Indian goods.

 

Traders are now mainly focussed on the MPC meeting outcome, dealers said. 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% Monday. The five-year contract is seen at 5.62-5.78%.

 

	At 1700 IST	THURSDAY
1-year OIS	5.51%	5.51%
2-year OIS	5.47%	5.47%
5-year OIS	5.72%	5.73%
2-year MIFOR	6.00%	5.99%
5-year MIFOR	6.21%	6.20%

 

End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Ashish Shirke

 

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