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Informist, Friday, Aug. 29, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended higher Friday, tracking a rise in government bond yields. After 1600 IST, higher-than-expected GDP growth reduced hopes of a domestic rate cut in 2025, dealers said.

The one-year swap rate ended at 5.52%, up from 5.49% Thursday. The five-year swap rate ended at 5.79%, against 5.74% Thursday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 285.40 billion, rising from INR 245.45 billion in the previous session.

India's June quarter GDP growth rose to 7.8% from 7.4% a quarter ago, the highest in five quarters. An Informist poll of 17 economists saw GDP growth in the June quarter at 6.7%, while the Reserve Bank of India's estimate was 6.5%. Some traders were betting on a reading near 6.3%, which would have increased chances of a rate cut by the RBI's Monetary Policy Committee, dealers said. Those hopes were dashed after the reading and traders said hopes of a further rate cut were now minuscule.

"Short-term swaps should see the most impact, the positioning should move to being paid," a dealer at a private-sector bank said. "At the margin, this takes away any great argument for rate cuts in 2025."

Swap rates up to two years still reflected a significant chance of a repo rate cut in India in December, dealers said. Some traders were also unconvinced the high growth reading would trigger any change in the decision making of the rate-setting panel, due to statistical distortions in the real GDP reading from a base effect and a low GDP deflator. Moreover, they cited the recent instance of the Monetary Policy Committee cutting the policy repo rate by a surprise 50 basis points at its June meeting, barely a week after the March quarter GDP reading, which was also higher than expected.

Swap rates had risen even before the GDP reading modestly moved the rate-cut view. The yield on the 10-year benchmark gilt ended 4 bps higher at 6.57%, rising as high as 6.64% intraday. Cut-off prices at the weekly gilt auction were far lower than expected for the 6.68%, 2040 bond, and traders hedged the risk of the supply hitting their portfolios by paying fixed rates, dealers said.

"The market had already taken a hit after the auction cut-offs. People had expected the auction to go better," a dealer at a primary dealership said. "Domestic traders were all paying as the supply came on to the book."

OUTLOOK
OIS rates are not traded Saturday. On Monday, swap rates will track the movement of US Treasury yields at the open, dealers said.

US core Personal Consumption Expenditures Price Index inflation rose 0.3% on month in July, the same as in June and in line with expectations. The US Federal Reserve's preferred inflation gauge rose 2.9% on year, its quickest pace since late 2023. Fed fund futures still showed an 87% chance of a 25 bps rate cut by the US Federal Open Market Committee in September, according to the CME's FedWatch tool.

On the domestic front, swap rates will also track the movement of gilt yields during the day after the volatility in the bond market. Short-term swap rates, which still show a likely rate cut in India, are seen rising after India's GDP growth in the June quarter was 7.8%, sharply above expectations of a 6.7% reading.

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 and CPI inflation may be below the RBI's forecast of 3.1% for FY26 by 20-50 bps, they said.

The one-year swap rate is seen in the range of 5.40-5.60% Monday. The five-year contract is seen at 5.68-5.83%.

End

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

Edited by Rajeev Pai

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