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Informist, Tuesday, Aug. 5, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended slightly lower on the eve of the Reserve Bank of India's Monetary Policy Committee as some traders bet that the panel to cut the repo rate by 25 basis points. However, a majority of the market expects a status quo on rates, preventing a further fall in swaps, dealers said.

The one-year swap rate ended at 5.44%, from 5.45% Monday, the lowest close since May 2, 2022. The five-year swap rate ended at 5.64%, flat from the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform fell to INR 387.35 billion from INR 440.95 billion Monday.

The three-day MPC meet will conclude Wednesday, with RBI Governor Sanjay Malhotra due to outline the rate decision at 1000 IST. Traders expect the governor to signal the MPC has room to cut rates further in 2025, rather than reiterating commentary from the last policy review when he said the panel had very little room left to support growth further. The MPC has cut the repo rate by 100 bps since February to 5.50% in June in a bid to front-load policy easing and aid flagging growth. 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.

"There was strong receiving interest today (Tuesday) in swaps, as traders want to position before policy," a dealer at a private bank said. "It is better to position for a rate cut in swaps that it is in g-sec (government securities) as there are underlying demand issues there." 

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. 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. After market hours Tuesday, Trump threatened to substantially raise tariffs on Indian goods within the next 24 hours.

However, most traders continued to expect the MPC members would stand pat on rates as they assess the evolving trajectory of growth and inflation amid uncertain global dynamics and with sizeable rate cuts already delivered. Instead, the RBI may trim its CPI inflation and GDP growth projections for 2025-26 (Apr-Mar) by 10-30 bps each from the 3.7% and 6.5%, respectively. This was already reflected in swap rates, which fell sharply on Monday, with the one-year benchmark falling to an over three-year closing low.

"Everything except a (rate) hike seems to be on the table tomorrow (Wednesday), but the market has already reacted a lot on Monday both to the domestic situation and the fall in US yields," a dealer at a primary dealership said. "Anything more than this would be overpricing the move, and nobody really has a view of two more rate cuts from here."

OUTLOOK
On Wednesday, OIS rates may open steady ahead of RBI Governor Malhotra's statement at 1000 IST, dealers said. The impact of the movement in US Treasury yields may be muted ahead of the domestic rate decision.

If the MPC cuts rates by 25 bps, the one-year swap rate may fall sharply to as low as 5.30% and shorter-term swap rates may tumble, dealers said. With a fall in the repo rate, the overnight Mumbai Interbank Outright Rate fixing may fall to around 5.15%, they said. However, if the MPC holds the repo rate at 5.50%, Malhotra's commentary on growth and inflation and the likelihood of further rate cuts in Oct-Dec will determine where swap rates settle.

On the liquidity front, traders have priced in overnight borrowing rates close to the repo rate 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, which has been set above 5.40% since Jul. 18.

The one-year swap rate is seen in the range of 5.30-5.60% Wednesday. The five-year contract is seen at 5.45-5.75%.

End

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

Edited by Saji George Titus

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