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Informist, Thursday, Aug. 14, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended slightly higher Thursday as traders entered into deals paying swap rates while buying government bonds. The rising differential between swaps and bond yields and India's ratings upgrade by S&P Global Ratings lured traders towards the fixed income market, while making receiving OIS rates unattractive, dealers said. 

The one-year swap rate ended at 5.51%, against 5.50% Wednesday. The five-year swap rate ended at 5.67%, against 5.64% Wednesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform fell to INR 341.95 billion from INR 491.00 billion on the previous day.

The 10-year benchmark gilt yield fell 8 basis points, the most in a day since Apr. 2, to 6.40% Thursday after S&P Global Ratings upgraded India's sovereign credit rating to 'BBB' from 'BBB-' with a stable outlook. The rating agency had changed its rating outlook on India to 'positive' in May last year. Dealers said the rating upgrade may lead to foreign investment flows into the bond market, though the additional flows into OIS markets may be limited.

Traders were undertaking bond-swap trades on the view that gilt yields have more scope to fall after the recent rise, while swap rates may not fall sharply further, as they already reflected a further rate cut in India, dealers said. Bond yields have risen nearly 15 bps over the past week due to supply pressure amid a pessimistic view on further domestic rate cuts. Consequently, the spread between the five-year gilt yield and the five-year OIS rate on Wednesday had risen to 55 bps, the highest since early April. The spread contracted to 48 bps by Thursday's close.
 

"The ratings upgrade helps bonds, FPIs may now flock to the market," a dealer at a private sector bank said. "Also, people have made some money in swaps already, every trader has been received (had a received position on OIS) here while being short on g-sec (government securities). So bond swaps have reached a good level now."

Offshore traders have been receiving swap rates over the last few days on the view that the US Federal Open Market Committee would cut rates in September, potentially opening the door to further rate cuts in India. The activity continued through the day as well, which led to the five-year swap rate falling to a low of 5.63% earlier in the day. 

India's OIS rates continued to price in chances the Reserve Bank of India's Monetary Policy Committee would cut the policy repo rate by at least 25 bps from the current 5.50% in Oct-Dec. While the rating upgrade suggested growth remained robust, with S&P underling a muted impact of US tariffs on India, traders retained their hopes on rate cuts due to slowing domestic economic activity and dampened exports.

Banks also paid fixed rates after they entered bond forwards and forward-rate agreements with long-term investors for the stock of the 30-year bond at auction Friday, dealers said. The paying was largely concentrated in the five- and seven-year segments, they said. The government sold INR 130 billion of a new 30-year, 2055 bond. The bond's coupon was set at 7.24%, lower than the 7.25% seen in an Informist poll, suggesting strong demand.

"A 10-year forward on the 30-year bond is giving a return of over 8%," a fund manager at a life insurance firm said. "Obviously, we won't be able to enter a contract at that level because the swap is illiquid, but the yields are really good."

OUTLOOK
India's financial markets are shut Friday for Independence Day. OIS rates are not traded on Saturdays. On Monday, the rates may take cues from the movement in US Treasury yields after the meeting of US President Donald Trump and Russian President Vladimir Putin, dealers said. Should the two leaders manage to chart out a plan for an end to the war between Russia and Ukraine, offshore receiving may drive swap rates lower, traders 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% Monday. The five-year contract is seen at 5.62-5.76%.

End

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

Edited by Saji George Titus

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