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Informist, Tuesday, Sept. 9, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended slightly lower Tuesday due to a sharp fall in US Treasury yields. The fall was limited as mounting hope of an outsize rate cut by the US Federal Open Market Committee did not translate to the domestic market, with the Reserve Bank of India's Monetary Policy Committee not seen likely to cut rates further in 2025, dealers said.

The one-year swap rate ended at 5.48%, against 5.49% Friday. The five-year swap rate ended at 5.70%, down from 5.72% Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform nearly doubled to INR 688.70 billion from INR 352.65 billion the previous session. Money markets were shut on Monday for Id-e-Milad.

The yield on the 10-year US Treasury note fell to 4.07% at 1700 IST Tuesday from 4.16% on Friday after US non-farm payrolls for August rose by only 22,000, sharply lower than the estimate of 75,000. The unemployment rate inched up to 4.3%. This has raised chances of a 50-basis-point rate cut by the Federal Open Market Committee this month, with traders now fully pricing in at least a 25-bps cut at the meeting, according to the CME FedWatch tool.

"The five-year OIS will not go up when US yields are down so sharply, unlike the bond market today (Tuesday)," a dealer at a primary dealership said, referring to the rise in government bond yields. "You say what you like on the domestic view, but offshore receiving has been pretty consistent and is unlikely to change."

The surge in volumes came from the three-month contract, which was the most traded contract Tuesday and hit a record turnover. The trade in the three-month swap was likely a large investor paying fixed rates to manage the risk on its underlying fixed income holdings, including government bonds, dealers said. Managing the risk via the short-term rate required the large quantum of trade, while a sharp fall in the three-month swap rate is unlikely even if the market starts pricing in rate cuts in October or December

However, the possibility of another rate cut in India remains less than 50%, which is reflected in swap rates maturing in up to two years, dealers said. They cited the central bank's projections of rising inflation from Oct-Dec, culiminating in an estimated 4.9% reading in Apr-Jun 2026. Moreover, India's real GDP growth rose to a five-quarter high of 7.8% in the June quarter of 2025, which had also dashed the hopes of some traders.

"If we were expecting a rate cut, do you think the one-year (swap rate) would be at 5.48%?," a dealer at another primary dealership said. "Instead, from the RBI's comments the market has to worry about a rate hike in the next 12-15 months."

Some traders maintain the MPC will cut rates noting the growth slowdown in the country, particularly after the imposition of a 50% tariff on India's exports to the US. Even before the tariff hit, nominal GDP growth too in Apr-Jun, at 8.8%, was lower than the recent average of above 10.5%, dealers said. Some traders also retained the view that if the FOMC cuts rates by a jumbo 50 bps in September, it would likely increase bets on rate cuts in India as well as drive OIS rates down further.

OUTLOOK

On Tuesday, swap rates are likely to track the movement in US Treasury yields after further weakness in the labour market in the world's largest economy, dealers said. Government data in the US revised down job gains in 2024-25 (Apr-Mar) by 911,000, suggesting labour market weakness was well-entrenched and making the case for the FOMC to cut rates at its meeting next week.

A further fall in swap rates is unlikely as a rate cut in the US is expected but traders remain uncertain of further rate cuts in India. At the same time, offshore traders are likely to continue receiving fixed rates and put downward pressure on swap rates, dealers said. 

Traders may also take cues from geopolitical developments, especially on the US-imposed tariffs on India. Some traders also await India's inflation data for August, which is to be released Friday, dealers said. CPI inflation in India likely rose to 2.1% in August from an eight-year low in July because of fading of the statistical effect of a favourable base and a rise in food and gold prices, according to an Informist poll of 12 economists.

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 5.42-5.55% Wednesday. The five-year contract is seen at 5.60-5.75%.

End

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

Edited by Avishek Dutta

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