India IRS Review
Jump; received bets unwind as MPC stands pat on rates
This story was originally published at 22:09 IST on 6 August 2025
Register to read our real-time news.Informist, Wednesday, Aug. 6, 2025
By Aaryan Khanna
MUMBAI – Overnight indexed swap rates ended sharply higher Wednesday as traders unwound their received fixed rate positions they had placed ahead of the Reserve Bank of India's Monetary Policy Committee outcome, betting on a rate cut, dealers said. The rate-setting panel unanimously held rates and kept its stance unchanged at 'neutral', disappointing a section of the market which had positioned for a rate cut.
The one-year swap rate ended at 5.51%, sharply up from 5.44% Tuesday, marking its highest single-day rise since May 8. The benchmark rate closed at its lowest level in 39 months over the last two days.
Traders had expected RBI Governor Sanjay Malhotra 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.
"There was nothing to do but to cut the positions," a dealer at a private bank said. "People had received across all tenures they could find good levels for, and that knee-jerk reaction has kept the (OIS) rates up since morning."
While the governor did say the MPC would take rate decisions on a policy-by-policy basis based on incoming data, keeping the door open for further rate reductions, traders trimmed their bets on a cut even at the next policy in October. The central bank retained its GDP growth projection of 6.5% for 2025-26 (Apr-Mar), and forecast growth in Apr-Jun of 2026 at a robust 6.6%. The RBI cut its CPI inflation forecast by 60 basis points to 3.1% in FY26 and projected April-June 2026 inflation at 4.9%, the highest expected in six quarters.
The one-year swap rate reflects a lower chance of an October policy easing but still prices in a 50% chance of a December rate cut. Until Tuesday, it had also factored in a 30% chance of a rate cut Wednesday, dealers said, assuming the overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – would be 5.40%. Swaps maturing up to one year were the most affected by the repricing in near-term rate expectations. The six-month swap rate rose 8 bps Wednesday to 5.48%, the biggest single-day jump in the contract since Jan. 13 amid a spike in volumes as well.
The five-year swap rate ended at 5.70%, against 5.64% the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform rose to INR 553.80 billion from INR 387.35 billion Tuesday.
The rise in the five-year swap rate was kept in check by some offshore traders receiving fixed rates. Economists from ANZ Bank rolled over their rate cut call to October from August, while Goldman Sachs retained its Oct-Dec rate cut call despite citing risks. MUFG expects a total of 50 bps of further rate easing by December.
The outlook for the rise in two- and five-year swap rates is limited in the near-term as traders are likely to receive India's swap rates amid growing expectations of further policy easing by the US Federal Reserve. According to the CME FedWatch tool, rate cut expectations for the September Federal Open Market Committee meeting are over 90%.
"Broader flows will come in emerging markets as US rate hopes build up and traders will look at India swaps rising to take a punt," a dealer at a foreign bank said. "But today the flow wasn't so large as the policy has just been announced."
OUTLOOK
On Thursday, OIS rates may open steady after the volatility following the MPC decision, dealers said. Traders may continue to pay fixed rates as they assess whether the rate-setting panel will reduce rates further.
The MPC's unanimous pause on rates and the RBI's forecasts for growth and inflation in the June quarter of 2026 suggest a high bar for rate cuts. However, traders still see the possibility of the panel cutting rates in Oct-Dec if GDP growth surprises on the downside, dealers said.
On the liquidity front, traders have priced in overnight borrowing rates close to the repo rate. 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 5.45-5.56% Thursday. The five-year contract is seen at 5.64-5.76%.
At 1700 IST | TUESDAY | |
1-year OIS | 5.51% | 5.44% |
2-year OIS | 5.47% | 5.39% |
5-year OIS | 5.70% | 5.64% |
2-year MIFOR | 5.92% | 5.89% |
5-year MIFOR | 6.14% | 6.12% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Saji George Titus
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