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Informist, Tuesday, Aug. 26, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended on a mixed note Tuesday. While the one-year swap rate was steady owing to the lack of fresh cues on domestic interest rates, the five-year swap rate rose as traders paid fixed rates to offset risk on their underlying gilt holdings, dealers said.

The one-year swap rate ended at 5.52%, the same as on Monday. The five-year swap rate ended at 5.78%, against 5.75% Monday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 355.35 billion, higher than INR 283.80 billion in the previous session.

The yield on the 10-year benchmark gilt hit a high of 6.66% Tuesday, the most since Mar. 19. It ended at 6.60%. The benchmark yield has risen 20 basis points in the past seven trading sessions. In the same period, the five-year swap rate has risen just 11 bps, which has resulted in paying the five-year swap becoming a more lucrative trade, dealers said. Moreover, some traders were paying fixed rates to hedge the risk from the state bonds they picked up at the auction Tuesday, they said. Fourteen states raised INR 288.92 billion through bond sales.

As the five-year swap rate rose above the psychologically crucial 5.75% level, some traders hit stop-losses as they had not expected the level would be breached, dealers said. Traders had also received fixed rates above this level Monday.

"As traders are seeing bond yields rise every day and a lot of shorts (short sales) are also built up in the 10-year (government bond), they are hedging in OIS some more," a dealer at a private-sector bank. "Also, bond yields have risen very sharply, so if there's any positive news, bonds will rally while OIS will not do too much."

Meanwhile, the one-year swap rate still reflected the chance of a rate cut by the Reserve Bank of India's Monetary Policy Committee in Oct-Dec, dealers said. Notional trade volumes in the contract rose due to two-way trade on that view as some traders worried that the RBI seemed to be in no mood to ease monetary policy after Governor Sanjay Malhotra said Monday the Indian economy has robust macroeconomic fundamentals.

Separately, Fitch Ratings Monday had 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 follow suit. Additionally, Fitch forecast India's GDP growth for the financial year 2025-26 (Apr-Mar) at 6.5%, same as the RBI's forecast.

"There are no flows on either side now, the offshore guys have also turned quiet," a dealer at a primary dealership said. "For one, they are already quite heavily received (have received fixed rates), and after the Fitch news, structurally India doesn't make too much sense to go heavy in."

Despite this, traders remained hopeful of at least another 25-bps cut from the current repo rate of 5.50% if GDP growth slows at a sharper pace than the RBI expects. This is more likely now with the 50% tariffs by the US on India's exports to the world's largest economy set to go live Wednesday, dealers said. US Customs and Border Enforcement notified the additional tariff Tuesday.

OUTLOOK
Money markets are shut Wednesday for Ganesh Chathurti. On Thursday, 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 at 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 tariffs are set to go live Wednesday morning IST.

The one-year swap rate is seen in the range of 5.48-5.60% Thursday. The five-year contract is seen at 5.70-5.83%.

End

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

Edited by Rajeev Pai

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