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Informist, Tuesday, Aug. 12, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended off lows as the India CPI for July was slightly higher than what traders had expected, dealers said. While there is no change in the domestic rate view after the data, traders were cautious ahead of the US CPI print scheduled after market hours.

The one-year swap rate ended flat at 5.51% for the third straight session. The rate had fallen to 5.49% earlier in the day. The five-year swap rate ended at 5.67%, against 5.68% on Monday. The five-year rate had fallen to as low as 5.65%, largely as offshore traders received fixed rates before the US data.

Data released at 1600 IST showed India's headline CPI inflation fell to 1.55% in July, the lowest print since June 2017. This was higher than the median estimate of 1.3% in an Informist poll, which would have been a record low. Traders said a slowdown in GDP growth would be a more crucial factor to bet on further rate cuts and expected CPI inflation to evolve in line with the Reserve Bank of India's revised projections for the rest of 2025. The forecasts show headline retail inflation well below the central bank's 4% target. The RBI Wednesday pared its forecast for CPI inflation in the September quarter by 130 basis points to 2.1%.

"People were not looking at inflation for where rates are going. This was discounted entirely, and it's not as if the RBI will begin hiking with 1.55% inflation," a dealer at a private-sector bank said. 

Even with India's inflation data due during market hours, trade volumes were lacklustre. The total notional trade volume on Clearing Corp. of India's derivatives trading platform fell slightly to INR 231.40 billion from INR 247.55 billion Monday. This was due to caution ahead of the US inflation reading, which was expected to be a significant trigger for swap rates Wednesday, dealers said.

The US inflation print is likely to lend more direction to domestic swap rates as it may cement hopes of a rate cut by the US Federal Open Market Committee at its next meeting in September, dealers said. Recent jobs and economic data have increasingly led to US policymakers considering a rate cut at the next meeting. In July, the FOMC held rates, though two members of the panel voted for a rate cut. Offshore traders continued to receive fixed rates in India, including in the four- and five-year contracts Tuesday, dealers said. 

Data released after market hours showed US consumer prices rose 0.2% on month in July, and core CPI inflation was up 0.3%, in line with a Dow Jones poll. With the readings in line with expectations, dealers said domestic swap rates may fall due to offshore traders receiving fixed rates as they firm up their view on US rate cuts. According to the CME's FedWatch tool, there was a 94.2% chance traders had priced in the FOMC lowering the federal funds target range by 25 bps in September, against around 85% before the reading.

"The market had revised its expectations upwards to 0.3%, 0.35% core inflation in the US, that is already in the price," a dealer at a foreign bank said. "People are not really worried about high inflation, they were just hoping it is not high enough to disrupt the rate cut."

With the US likely to cut its policy rate in September-December, traders remain hopeful the RBI's Monetary Policy Committee will also cut the policy repo rate by 25-50 basis points from the current 5.50%. India's swap rates continued to reflect a 25-bp rate cut in the December quarter, dealers said. The calculation was based on the overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – being set near the repo rate. The overnight MIBOR rate was set at 5.50% Tuesday.

OUTLOOK
OIS rates may take cues from the movement in US Treasury yields after the release of US CPI data, dealers said. US consumer inflation in July was in line with analyst expectations. The 10-year US Treasury yield was at 4.25% at 1900 IST from 4.28% at the end of Indian market hours.

Traders are assessing whether India's rate-setting panel will reduce the policy repo rate further, with some hopes diminished after the RBI policy review last week. 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% tariff on Indian goods from Aug. 27, 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%.

End

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

Edited by Saji George Titus

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