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Informist, Monday, Aug. 25, 2025

 

By Cassandra Carvalho

 

MUMBAI – Overnight indexed swap rates ended higher Monday, reversing a fall earlier in the day, as offshore investors paid fixed rate contracts tracking a rise in gilt yields after Fitch Ratings retained India's sovereign credit rating at "BBB-", dealers said.

 

The one-year swap rate ended at 5.52%, against 5.53% Friday. The five-year swap rate ended at 5.75%, against 5.74% Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 283.80 billion, similar to INR 241.85 billion in the previous session.

 

Swaps opened lower tracking a fall in US Treasury yields after US Federal Reserve Chair Jerome Powell left the door open for resuming rate cuts in the US. At his speech at the Jackson Hole symposium Friday, Powell seemed to suggest some long-awaited policy easing would come through quickly. The Fed chief hinted at a potential rate reduction at the US Federal Open Market Committee's September meeting. He acknowledged growing concerns about employment conditions and emphasised persistent inflation risks. The US rate-setting panel has held policy rates so far 2025 despite pressure from President Donald Trump, after cutting its policy rate by 100 basis points in Sept-Dec 2024. Fed fund futures showed an 83.3% chance of a 25 bps rate cut by the US FOMC in September, up from 82.7% a week ago, according to the CME FedWatch tool, as of 1700 IST.

 

However, swap rates recovered slightly after Reserve Bank of India Governor Sanjay Malhotra said India's economy is characterised by robust macroeconomic fundamentals, dealers said. At the FIBAC 2025 conference in Mumbai, Malhotra said India is set to become the world's third largest economy and corporate balance sheets are healthy. He also said the central government's fiscal position is strong. Malhotra said the central bank has "not lost sight of the objective of growth" and would continue with its monetary policy to maintain price stability with a focus on growth. Expectations that domestic growth may not slow down and the RBI is comfortable with the current growth rate also led to a paying bias in swaps. 

 

"G-sec (government securities) got sold off so some paying happened," a dealer at a private-sector bank said. "Otherwise nothing else happened in OIS, just 1-2 bps movement here and there."

 

Later in the day, swap rates rose, tracking a sharp rise in gilt yields, with the 10-year benchmark 6.33%, 2035 gilt nearing the psychologically crucial 6.60% level. Yields rose after Fitch Ratings affirmed India's sovereign credit rating at "BBB-" with a "stable" outlook. S&P Global Ratings had upgraded India's rating to "BBB" from "BBB-" with a "stable" outlook on Aug. 14, and traders were disappointed that Fitch did not do the same. Additionally, Fitch forecast India's GDP growth for the financial year 2025-26 (Apr-Mar) at 6.5%, same as the RBI's forecast. However, the five-year swap rate did not sustain a rise above the key technical level of 5.75%, as receiving fixed rates at this level was lucrative, dealers said.

 

"It (five-year OIS) is not crossing 5.75-5.76%, so there is nothing to be concerned about," a trader at a primary dealership said. "If this level is broken, we see some upward movement to 5.78% first, then 5.80-5.82%."

 

OUTLOOK
Tuesday, swap rates will track the movement of US Treasury yields at the opening, dealers said. Swap rates will also track the movement of gilt yields during the day.

 

Volumes may be muted due to the lack of major trading cues until India's GDP growth for Apr-Jun is released. Powell's comments provided fleeting relief to Indian swap traders, but for cues on the domestic rate-cut cycle, traders await India's GDP growth print for Apr-Jun, due 1600 IST Friday. According to an Informist Poll of 17 economists, India's GDP is expected to have expanded 6.7% in the first quarter of FY26. In an interview with CNBC-TV18 Thursday, Monetary Policy Committee member Saugata Bhattacharya also noted that a low GDP deflator may drive up real GDP growth in the June quarter.

 

While India's goods and services tax reforms are seen bringing inflation down, the RBI's rate-setting panel 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 bps, they said.

 

On the global front, investors await the US Personal Income and Outlays for July Friday, wherein core inflation is seen at its highest level since late 2023 at 2.9%. Traders also await clarity on the imposition of tariffs by the US on India, especially after Fitch said US tariffs pose a moderate downside risk to India's growth forecast. 

 

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

 

	At 1700 IST	FRIDAY
1-year OIS	5.52%	5.53%
2-year OIS	5.50%	5.49%
5-year OIS	5.75%	5.74%
2-year MIFOR	6.03%	6.05%
5-year MIFOR	6.13%	6.30%

 

End

 

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

Edited by Rajeev Pai

 

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