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Informist, Friday, Aug. 22, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended little changed Friday due to a lack of fresh domestic cues on interest rates. Some traders paid fixed rates near the end of trade ahead of US Federal Reserve Chair Jerome Powell's speech at the Jackson Hole Economic Symposium at 1930 IST, dealers said.

The one-year swap rate ended at 5.53%, against 5.52% on Thursday. The five-year swap rate ended at 5.74%, against 5.73% Thursday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 241.85 billion, similar to INR 240.95 billion in the previous session.

Caution before Powell's speech after market hours led to a slight rise in the five-year swap rate, dealers said. While domestic swap rates would broadly track the movement in US Treasury yields over the weekend after the speech, some traders said they may change their position on swaps depending on what Powell said about US rate cuts.

A reduction in rate cut hopes in the US may bring down the offshore receiving interest that is capping swap rates, and may be a good opportunity to pay fixed rates, dealers said. Fed funds futures reflect a 71% chance of a 25-basis-point rate reduction by the US Federal Open Market Committee at its next meeting in September, according to CME's FedWatch tool. 

"My sense is Powell is going to be hawkish at the margin. He will not do anything to change stance right now, he is going to signal his reluctance to cut rates," a dealer at a foreign bank said. Another dealer said the two-year swap rate saw some offshore paying interest, tracking a slight rise in short-term US Treasury yields ahead of the speech.

Meanwhile, trade volumes in swaps up to one year were muted due to a lack of fresh interest rate cues, with even the minutes of the Monetary Policy Committee's August meeting on Wednesday not changing traders' rate views. The one- and two-year swap rates continued to reflect a chance of a 25-bps repo rate cut in the remainder of 2025-26 (Apr-Mar), dealers said.

"There is nothing much to trade on in swaps these days," a dealer at a private sector bank said. "Considering that overnight rates are going up, automatically, the base of the one-year and even short-term swaps are going up. In the two-year swap, eventually people will look at the cycle turning and price in rate hikes."

The overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract - was set at 5.57% on Friday, up from consistent readings around 5.30% in early July. OIS pricing now reflects the fixing at the policy repo rate rather than below it, dealers said.

OUTLOOK
Swap rates are not traded on Saturdays. On Monday, swap rates will track the movement in US Treasury yields after US Federal Reserve Chair Powell's speech at the Jackson Hole Economic Symposium Friday, dealers said.

Swap rates will only indirectly track Powell's comments through the movement of US yields. Powell's comments will be tracked for any indication of a rate cut by the US FOMC in September, which is widely expected by dealers.

Next week, volumes may be muted due to a lack of major trading cues until India's GDP growth for Apr-Jun is released on Aug. 29. Several traders may also be on leave due to Ganesh Chaturthi celebrations in Mumbai. The outlook on GDP growth is mixed, with some expecting a print higher than the RBI's forecast of 6.5%, due to a strong monsoon and a favourable base. In an interview with CNBC-TV18 Thursday, MPC member Saugata Bhattacharya also noted a low GDP deflator may drive up real GDP growth in the June quarter. Other traders expect a lower print due to weak credit offtake and corporate earnings.

While India's goods and services tax reforms are seen bringing down 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 of 3.1% for FY26 by 20-50 basis points, they said.

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

End

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

Edited by Saji George Titus

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