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Informist, Thursday, Aug. 7, 2025

 

By Aaryan Khanna

 

MUMBAI – Overnight indexed swap rates ended lower Thursday as traders took advantage of a spike in rates Wednesday to receive fixed rates, with offshore flows also contributing to the fall, dealers said. The fall in rates came from muted volumes as uncertainty of further rate cuts in India persisted a day after the rate decision.

 

The one-year swap rate ended at 5.49%, down from 5.51% Wednesday. The five-year swap rate ended at 5.67%, against 5.70% the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform fell sharply to INR 161.15 billion from INR 553.80 billion Wednesday.

 

Amid the low volumes, even limited offshore flows led to swap rates falling, as domestic traders had unwound their received bets on Wednesday and were not keen to take large positions in OIS rates immediately, dealers said. Expectations of a rate cut in the US in September and conviction of another potential rate cut in India in October, December, or both, drove the interest from offshore participants, they said. 

 

"We were hearing the move is driven by offshore flows, largely in the five-year segment," a dealer at a primary dealership said. "We don't see a need to really play the swap rates right now, let's allow the data to come in and settle down. There was not a lot of activity from the domestic side."

 

Some traders also said the additional tariffs imposed by the US on India may convince the Reserve Bank of India's Monetary Policy Committee to cut rates sooner or by a larger margin than expected earlier. Post market hours Wednesday, US President Donald Trump announced an extra 25% tariffs on Indian exports to the US starting Aug. 27. Previously, the US had imposed 25% tariffs on Indian goods, along with an additional penalty, for importing oil from Russia, which came into effect Thursday. Should the new tariffs persist, India's GDP growth in 2025-26 (Apr-Mar) is seen lower by up to 100 basis points from the RBI's forecast of 6.5%, dealers said.

 

However, dealers said the one-year swap rate – a barometer for domestic rate cut expectations in the near term – was already pricing in a high chance of a rate cut in the December quarter even after the rate decision. On Wednesday, the MPC maintained a status quo on the repo rate at 5.50% and retained its 'neutral' policy stance. Comments from RBI members and the central bank's forecasts for growth and inflation in Apr-Jun of 2026 had raised the bar for further rate cuts, dealers said.

 

"Today's (Thursday's) move doesn't mean anything, since there were not a lot of volumes," a dealer at a private sector bank said. "There was already a rate cut in the price in swaps, and I don't know if there is really more confidence today on it."

 

OUTLOOK
On Friday, OIS rates may open steady after the volatility following the MPC decision, dealers said. Traders may remain on the sidelines as they assess whether the rate-setting panel will reduce the policy repo rate further, with the next key data point being the July CPI inflation print to be released on Tuesday.

 

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, particularly with the US imposing a cumulative 50% tariffs on imports from India, 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 Mumbai Interbank Outright Rate, 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% Friday. The five-year contract is seen at 5.64-5.76%.

 

	At 1700 IST	TUESDAY
1-year OIS	5.49%	5.51%
2-year OIS	5.44%	5.47%
5-year OIS	5.67%	5.70%
2-year MIFOR	5.89%	5.92%
5-year MIFOR	6.12%	6.14%

 

End

 

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

 

Edited by Tanima Banerjee

 

 

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