India IRS Review
Long-term rates fall on offshore receiving post US CPI
This story was originally published at 18:57 IST on 13 August 2025
Register to read our real-time news.Informist, Wednesday, Aug. 13, 2025
By Srijita Bose
MUMBAI – Overnight indexed swap rates maturing in one-year and more fell as offshore traders received fixed rates after the release of US CPI data, which cemented rate cut bets in the US, dealers said. While there was no change in the domestic rate view, expectation of a rate cut in the US led traders to receive swap rates, they said.
The one-year swap rate ended at 5.50%, against 5.51% on Tuesday. The five-year swap rate ended at 5.64%, against 5.67% on Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform more than doubled to INR 491.00 billion from INR 231.40 billion the previous day.
"We fell to pre-policy levels because of some foreign hedge funds, offshore also rates are slightly lower," a dealer at a primary dealership said. "But we will have to see whether these levels sustain because there is no domestic rate view right now."
Chances of rate cut by the Federal Open Market Committee has increased after the release of US CPI inflation data released Tuesday. Currently, traders see more than 96% probability of a 25-basis-point rate cut at the upcoming meeting of the FOMC, according to the CME's FedWatch tool.
However, with traders not pricing in any domestic rate cut by the Reserve Bank of India's Monetary Policy Committee, government bond yields have risen, dealers said. Onshore traders paid fixed rates on swaps to hedge their gilt buys, they said.
"The thing is even though there is still some pricing of a rate cut in OIS, it is frustratingly trading in a range," a dealer at a private sector bank said. "It is mostly because onshore guys are looking to hedge their gilt positions and there is some much uncertainty on where yields (in gilts) will go."
Some traders also said that the rise in gilt yields seem to have topped out and looked to enter into bond-swap trades--buying bonds while paying swap rates. However, due to caution on domestic rates and fears of a further rise in yields, traders waited for gilt yields to consolidate before taking aggressive bets, dealers said.
Meanwhile, swaps maturing in up to one-year rose due to a rise in overnight Mumbai Interbank Outright Rate--the floating leg of the OIS contract. The overnight MIBOR rate was set at 5.52% Wednesday. Traders likely entered into spread trades between the six-month and the nine-month swap, leading to a rise in trade volumes in those segments, dealers said. Meanwhile, demand for forward rate agreements in longer-tenure gilts also led to hedging in the seven-year swap, they said.
OUTLOOK
OIS rates may take cues from the movement in US Treasury yields, dealers said. Traders will also take cues from comments of Federal Reserve officials, they said.
Traders are assessing whether India's rate-setting panel will reduce the policy repo rate further, with some hope 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% Thursday. The five-year contract is seen at 5.62-5.76%.
At 1700 IST | TUESDAY | |
1-year OIS | 5.50% | 5.51% |
2-year OIS | 5.44% | 5.46% |
5-year OIS | 5.64% | 5.67% |
2-year MIFOR | 5.91% | 5.93% |
5-year MIFOR | 6.14% | 6.16% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Akul Nishant Akhoury
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