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Informist, Monday, Sept. 15, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady due to a lack of fresh cues on interest rates, dealers said. Traders remained cautious ahead of the US Federal Open Market Committee's rate decision Wednesday, which kept trade volumes in check, dealers said. 

The one-year swap rate ended at 5.48%, flat against Friday's close. The five-year swap rate ended at 5.71%, against 5.70% Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 174.75 billion, down from INR 225.60 billion Friday.

Traders expect 75 basis points of rate cuts in the US for the rest of 2025 after the recent economic data showing softness in the US labour market. If the FOMC does cut rates this week, it would be the first since December. Moreover, traders will closely track the FOMC's economic projections or "dot plot". The meeting outcome comes amid mounting pressure from US President Donald Trump on the US Federal Reserve to ease interest rates. Trump predicted a "big cut" from the FOMC this week. "I think you have a big cut," Trump told reporters Sunday. "It's perfect for cutting."

However, the CME's FedWatch tool shows traders fully pricing in a 25-bps cut at the outcome, with only 3% expecting a 50-bps cut. Hopes of the "jumbo" rate cut peaked at around 12% last week. The 10-year US Treasury yield also inched up to 4.07% at 1700 IST from 4.04% at the same time Friday, which led to some offshore traders unwinding their received fixed-rate bets on India's five-year OIS, dealers said. The flows were moderate and did not significantly move the rates, they said.

"The FOMC will do what it will do, but the market is waiting for signs of the RBI (Reserve Bank of India) taking action," a dealer at a primary dealership said. "In the one-year swap, there is a 20-25% pricing on another rate cut in October."

The RBI Monetary Policy Committee cut rates by 100 bps between February and June. It is widely expected to hold off on further rate cuts, with RBI officials, including Governor Sanjay Malhotra, drawing comfort from forecasts showing CPI inflation slightly above the RBI's target of 4% and GDP growth about 6.5%. Recent inflation prints have been benign, but a five-quarter high GDP growth print of 7.8% in the June quarter dashed most traders' hopes of further rate cuts in India in 2025.

However, if the FOMC does kickstart an aggressive rate-cutting cycle with a 50-bps cut, some traders remain hopeful it will open up room for the RBI to follow suit and ease monetary policy. Moreover, while inflation is poised to rise, the extent of the rise may be smaller than forecast due to factors such as the goods and services tax cut coming into effect next week and a revision to the CPI base year scheduled in February, dealers said.

Meanwhile, short-term swap rates were little changed as there were no significant domestic triggers, though traders kept a close eye on the overnight Mumbai Interbank Outright Rate, the floating leg of the OIS contract. Traders had begun pricing in the overnight MIBOR fixing of around 5.40% in recent days, which had eased swap rates maturing up to nine months. Over the past two days, the fixing had rising to 5.47% and 5.48% amid outflows from the banking system for advance tax payments. A further drain because of the monthly GST outflows may keep slight upward pressure on short-term rates, dealers said.

"Market was getting used to lower fixings. Nobody is panicking yet, everyone knows it's because of advance tax and even next week for GST (outflows)," a dealer at a private-sector bank said. "But it should return to 5.40% in a hurry next week for current pricing to be justified."

OUTLOOK

On Tuesday, swaps may open steady on caution ahead of the US FOMC rate decision Wednesday, dealers said. Offshore flows are unlikely to be significant only a day ahead of the outcome. The US rate-setting panel is universally expected to cut its policy rate by at least 25 bps, but Fed funds futures show only a less than 4% chance of a 50-bps rate cut, according to the CME FedWatch tool.

A further fall in swap rates is unlikely, given the expected rate cut in the US, but traders remain uncertain about 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 tariffs on Indian goods. India and the US will hold the next round of talks on the proposed bilateral trade agreement Tuesday in the national capital, India's chief negotiator, Rajesh Agrawal, said Monday.

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 5.40-5.55% Tuesday. The five-year contract is seen at 5.60-5.78%.

End

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

Edited by Rajeev Pai

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