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Informist, Monday, Aug. 4, 2025

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates slumped Monday as hopes of further rate cuts by the Reserve Bank of India reignited, leading to the benchmark one-year OIS rate ending at its lowest closing level in over three years. Soft US jobs data Friday also firmed up expectations of rate cuts by the US Federal Open Market Committee, leading to a fall in US Treasury yields and supporting the sentiment of further rate cuts in the domestic market, dealers said.

 

The one-year swap rate ended at 5.45%, sharply lower than 5.51% at Friday's close. This was the sharpest single-day fall since Apr. 4 and the lowest close since May 2, 2022. The rate is considered the barometer of near-term domestic interest rate expectations. 

 

The five-year swap rate ended at 5.64%, down from 5.72% the previous day. It tumbled the most in nearly six weeks to end at its lowest since Jun. 5. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 440.95 billion, almost triple that of INR 149.10 billion Friday.

 

Traders expect Reserve Bank of India Governor Sanjay Malhotra to signal the central bank's Monetary Policy Committee has room to cut rates further in 2025, after 100-basis-point cuts since February brought the repo rate to 5.50% in June. Near-term swaps have begun pricing a high chance of a rate cut in Oct-Dec, though a minority expect the RBI to surprise the market with a rate cut Wednesday, dealers said. That minority increased Monday, but only slightly – ICICI Bank joined State Bank of India and Nomura in saying it expects a 25 bps repo rate cut this week. Others, such as MUFG and Goldman Sachs, added an additional rate cut to their view of India's rate trajectory, research reports showed.

 

In June, the MPC had cut the repo rate by a larger-than-expected 50 bps and changed the policy stance to neutral from accommodative. RBI Governor Malhotra had also said monetary policy was left with "very limited space to support growth". But with inflation at a six-year low, concerns over slowing economic growth, which have been exacerbated with the imposition of tariffs by US President Donald Trump, make a case for a repo rate cut in August itself, dealers said.

 

"It looks to be a 50-50 whether the RBI will cut on Wednesday," a dealer at a private sector bank said. "There are enough cases to show that the risk is of easing too little rather than too much, but at the same time, they may want to wait for the Fed (US Federal Reserve) to cut further and the monsoon to pan out before taking more action."

 

The RBI is also expected to pare its CPI inflation projection for 2025-26 (Apr-Jun) by around 20 bps from the current 3.7%. It may also lower its GDP growth forecast of 6.5% for the fiscal, with economists and multilateral organisations seeing India's GDP growth to slow to 6.3% in FY26. This is seen opening up room for rate cuts of 25-50 bps in the remainder of the current financial year, dealers said.

 

The movement in swap rates maturing in over two years was largely driven by US yields falling, and included offshore traders receiving fixed rates, dealers said. The yield on the benchmark 10-year US Treasury note fell to 4.23% at 1700 IST from 4.38% at the same time Friday. Yields fell after US non-farm payrolls rose by 73,000 in July. This reading was worse than the market expectation of 110,000, and followed sharp downward revisions in the two previous readings. The three-month average non-farm payrolls added fell to multi-year lows.

 

After the reading, the CME FedWatch tool showed US traders were pricing in an 80% chance of a 25-bps rate cut at the FOMC meeting in September, which would be the first rate cut since December. Should the FOMC begin cutting rates, the MPC may have greater comfort in policy easing as the differential between the two countries will remain intact. Moreover, policymakers may also look to the June quarter growth reading at August-end before making a rate decision in the December quarter, dealers said.

 

"It is difficult to say how much exactly is being priced in for August, because the 2-month swap is still at 5.42-5.43%," a dealer at a foreign bank said. "At a fixing of 5.40%, that doesn't show any realistic rate cuts." The overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – has been set at 5.40-5.82% since Jul. 18.

 

OUTLOOK
On Tuesday, overnight indexed swap rates may track the movement of US Treasury yields at the open. The impact of the overseas cue may be limited ahead of the outcome of the MPC's three-day meet Wednesday, as further rate cuts have now been priced in to swaps, dealers said.

 

On the liquidity front, traders have priced in overnight borrowing rates close to the repo rate of 5.50% 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% Tuesday. The five-year contract is seen at 5.62-5.78%.

 

	At 1700 IST	FRIDAY
1-year OIS	5.45%	5.51%
2-year OIS	5.41%	5.47%
5-year OIS	5.64%	5.72%
2-year MIFOR	5.89%	6.00%
5-year MIFOR	6.12%	6.21%

 

End

 

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

 

Edited by Saji George Titus

 

 

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