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Informist, Wednesday, Sept. 3, 2025

By Cassandra Carvalho

MUMBAI – Most overnight indexed swap rates ended a tad lower Wednesday as offshore traders received fixed-rate contracts, dealers said. However, onshore traders paid fixed-rate contracts for bond swaps, and to hedge their bond forward rate agreements with life insurance companies ahead of Thursday's weekly gilt auction, they said.   

The one-year swap rate ended at 5.53%, little changed from 5.54% Tuesday. The five-year swap rate ended at 5.79%, down from 5.81% Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform jumped to INR 406.55 billion, higher than INR 195.10 billion the previous session.

Swaps opened lower due to offshore flows, dealers said. Foreign portfolio investors have also been buying gilts for the past one week, likely due to passive funds tracking the inclusion of Indian government bonds in FTSE Russell's Emerging Markets Government Bond Index Monday. Some active funds were also purchasing gilts and receiving fixed rate contracts in swaps, likely due to higher, attractive yield levels in India compared to other emerging market rates, dealers said. Expectations of a bilateral trade deal between India and US aided the receiving bias after Commerce Minister Piyush Goyal said a deal between the two countries could be finalised by November, they said. The three-month swap rate had the highest volume across swaps Wednesday at INR 74.00 billion.  

Domestic traders preferred to pay fixed-rate contracts, following the recent trend, to play on the yield spread between swap rates and gilts, by purchasing gilts at higher yields and paying lower rates in swaps. The spread between the five-year 6.01%, 2030 gilt and the five-year swap rate widened to 50 basis points, from nearly 31 bps at the end of July. Some traders preferred state bond swaps, due to the higher returns. Maharashtra's 7.86%, 2030 bond was last traded at a yield of 6.80%, a spread of 101 bps over the five-year swap's closing level of 5.79%.     

"I think the SDL (state bond) swap is very much lucrative rather than the G-sec (bond swap)," a trader at a primary dealership said. "But to gain from that trade there should be sufficient offers in the short-term SDL (state bonds) also because nowadays there is very little issuance in two to five year state bonds, and market is also not liquid in the two to five year segment." 

The government will sell INR 110 billion of the 6.28%, 2032 bond and INR 140 billion of the 7.09%, 2074 bond at the weekly gilt auction Thursday. Traders hedged their bond forward rate agreements with life insurance companies for the 2074 bond by paying fixed rate contracts in the seven-year and 10-year swap rates. The 10-year swap rate ended 2 bps higher at 6.05%, a spread of 131 bps over the 2074 bond's closing yield of 7.36%.   

"Whenever the seven- and 10-year (OIS contracts) are traded before an auction, it is almost certainly a bond forward-rate agreement between an insurer and a bank which doesn't mind the risk," a dealer at a foreign bank said. "Insurers want to lock in forward yields for as long as they can, but these tenures are generally not liquid enough for that."

OUTLOOK
On Thursday, swaps will track the movement of gilt yields after the result of the weekly bond auction. Swaps may also track the overnight movement of US Treasury yields after the release of the US job openings and labour turnover survey for July due at 1930 IST Wednesday, dealers said. Offshore flows due to expectations of a rate cut by the US Federal Open Market Committee at its meeting in September may cap any paying by onshore traders, they said. Traders may also take cues from geopolitical developments, after Goyal said a US-India trade deal was likely by November. 

Traders also await the Goods and Services Tax Council meeting outcome on Thursday for a clearer idea of potential revenue lost by the exchequer from a proposed rationalisation in GST rates.

Traders may trim any excess positions ahead of the long weekend. The RBI and money markets are shut Friday for Id-E-Milad. In the US, weekly jobless claims for the week ended Saturday are due post market hours Thursday, along with the crucial non-farm payrolls for August on Friday. 

Swaps may also track the movement of crude oil prices and the rupee against the dollar. The one-year swap rate is seen in the range of 5.48-5.60% Thursday. The five-year contract is seen at 5.75-5.85%.

End

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

With inputs from Aaryan Khanna

Edited by Deepshikha Bhardwaj

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