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Informist, Friday, Aug. 8, 2025

 

By Aaryan Khanna

 

MUMBAI – Overnight indexed swap rates reversed an earlier fall, tracking a sharp rise in government bond yields towards the close of trade, dealers said. Some market participants also unwound received fixed rate bets after a report suggested India would be open to reducing its oil imports from Russia, which led to traders rethinking their bets on further rate cuts in India.

 

"The market had been thinking about another rate cut, it was already factored into swaps at least," a dealer at a private sector bank said. "If the Russian oil situation gets resolved, then the US tariffs go away, then the hit to growth is no longer there, then the MPC (Monetary Policy Committee) doesn't cut rates."

 

The one-year swap rate ended at 5.51%, down from 5.49% Thursday. The five-year swap rate ended at 5.67%, flat against the previous day. The total notional trade volume on Clearing Corp. of India's derivatives trading platform rose to INR 351.10 billion from INR 161.15 billion Thursday. The 10-year gilt yield rose 3 basis points to 6.41% Friday, largely in the last hour of trade.

 

Effective Thursday, Indian exports to the US face a tariff of 25%. This will rise to 50% from Aug. 27 after the US Wednesday levied an additional tariff of 25% on India for buying crude oil from Russia. Once implemented, the 50% tariff will be among the highest faced by any country, alongside Brazil.

 

Traders had been betting on a rate cut in India in either October or December, reflecting largely in the one-year swap rate, dealers said. This was despite the Reserve Bank of India's projections at the monetary policy review concluded Wednesday suggesting a bar to further rate cuts was high. The central bank's MPC has cut the policy repo rate by 100 basis points to 5.50% since February.

 

The five-year swap rate ended flat, after having fallen to 5.64% during the day. The swap rate fell on persistently lower US Treasury yields as expectations of a rate cut by the US Federal Open Market Committee in September built up, dealers said. The 10-year US yield did not rise above 4.26% this week, after consistently approaching 4.50% in July.

 

"I've said it before, the offshore flow is going to be moving the swaps now," a dealer at a foreign bank said. "There was again receiving in the five-year from offshore, even though domestic guys were consistently on the paying side." Some traders paid fixed rates to hedge the bond forwards and forward-rate agreement contracts they had agreed to with insurance companies. 

 

OUTLOOK
OIS rates are not traded on Saturdays. On Monday, OIS rates may open steady as traders keep to the the sidelines, awaiting fresh rate cues. Traders are assessessing 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	THURSDAY
1-year OIS	5.51%	5.49%
2-year OIS	5.46%	5.44%
5-year OIS	5.67%	5.67%
2-year MIFOR	5.90%	5.89%
5-year MIFOR	6.12%	6.12%

 

End

 

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

 

Edited by Avishek Dutta

 

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