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Informist, Tuesday, Aug. 19, 2025

 

By Aaryan Khanna

 

MUMBAI – Overnight indexed swap rates ended off highs due to offshore traders receiving fixed rates. Some traders also unwound their received positions as benchmark swap rates hit two-month highs. Swaps maturing in up to three months inched up amid a spike in traded volumes, likely due to hedging activity from a corporate house or a mutual fund, dealers said.

 

The one-year swap rate ended at 5.54%, the same as Monday's close. The five-year swap rate ended at 5.74%, against 5.73% Monday. Earlier in the day, the one- and five-year swaps had hit 5.56% and 5.78%, respectively, the highest intraday levels since Jun. 13. The total notional trade volume on Clearing Corp. of India's derivatives trading platform tripled to INR 726.75 billion from INR 243.05 billion in the previous session.

 

Domestic traders have pared hopes of another rate cut by the Reserve Bank of India's Monetary Policy Committee in 2025 after Prime Minister Narendra Modi announced an intended consumption boost by Diwali through the rationalisation of goods and services tax rates. Near-term swaps were earlier pricing in a 25-basis-point rate cut at the MPC's October or December meeting due to GDP growth undershooting the central bank's forecasts amid tariffs on India by the US.

 

With the fiscal support, growth may be on firmer footing, reducing the need for monetary action, dealers said. Some traders also paid fixed rates to protect their underlying gilt holdings, with the 10-year benchmark yield rising at much as 5 basis points intraday to rise to a fresh four-month high.

 

"At 5.56%, the one-year swap is not showing any rate cut...even at current levels, it is showing a very small chance," a dealer at a foreign bank said. "It doesn't seem smart to pay at these levels when the pressure is all on bonds and demand-supply."

 

However, overseas traders continued to receive fixed rates in large volumes, betting on further easing by the US Federal Open Market Committee potentially giving room for a rate cut in India as well. These flows are likely to continue as foreign investors are wary about buying government bonds amid fiscal concerns, dealers said.

 

The three-month contract was the most traded Tuesday, with notional trading volumes reaching the highest since Apr. 2. The one- and two-month contracts were also heavily traded. Some traders said some part of the activity was due to the rise in the overnight Mumbai Interbank Outright Rate fixing to consistently near 5.50%, the repo rate, while a large investor is also likely to have hedged fixed income exposure through short-term swaps, dealers said.

 

"This activity is seen almost entirely from mutual funds, they would have hit the market in size in order to hedge their short-term bonds," a dealer at a primary dealership said. "Most of the domestic paying activity, around 80%, would be from mutual funds paying over the last two months or so."

 

OUTLOOK
On Wednesday, swap rates may take cues from the movement in US Treasury yields. Traders will watch out for US Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Symposium later in the week for any indication of a rate cut by the US FOMC in September. 

 

While India's goods and services tax reforms are seen reducing inflation, the RBI's MPC is only likely to cut rates if growth takes a hit, dealers said. The GST reforms are seen improving GDP growth, while CPI inflation may be below the RBI's forecast for FY26 by 30-50 basis points. 

 

Traders await any update on the proposed tax reforms, especially if states approve of the move. Near-term swap rates will track the movement of the overnight Mumbai Interbank Outright Rate. Traders will also track minutes of the MPC's August meeting at 1700 IST Wednesday for the panel's comments on growth and inflation.

 

The one-year swap rate is seen in the range of 5.48-5.60% Wednesday. The five-year contract is seen at 5.68-5.80%.

 

	At 1700 IST	MONDAY
1-year OIS	5.54%	5.54%
2-year OIS	5.50%	5.50%
5-year OIS	5.74%	5.73%
2-year MIFOR	6.00%	5.97%
5-year MIFOR	6.25%	6.21%

 

End

 

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

 

Edited by Avishek Dutta

 

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