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Informist, Tuesday, Sept. 16, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady due to a lack of fresh cues on interest rates, amid caution before the US Federal Open Market Committee meeting outcome on Wednedsay. Some traders expect the Reserve Bank of India's Monetary Policy Committee to cut the domestic policy rate after the US rate-setting panel begins easing rates, dealers said.

The one-year swap rate ended at 5.47%, against 5.48% at Monday's close. The five-year swap rate ended at 5.70%, against 5.71% Friday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 238.85 billion, up from INR 174.75 billion the previous session.

Short-term OIS contracts were the most traded, with nearly equal notional traded volumes in the three-month and one-year contracts. Traders continued to place bets that India's repo rate would come down from the current 5.50%. In a research note Tuesday, Morgan Stanley said it was expecting the MPC to cut rates by 25 basis points each in October and December policy reviews due to continued disinflation. A 25-bps rate cut in December was almost fully priced in to the one-year swap rate, though chances of a rate cut in October still remained remote, according to the market pricing, dealers said. It was mostly domestic traders who received fixed rates and offshore activity has fallen in the past few days, likely on caution before US rate decision, they said.

Despite stronger than expected real GDP growth prints in the last two quarters, traders said India's low inflation gave room for the domestic rate-setting panel to cut rates, dealers said. Economists expect CPI inflation to miss even the RBI's forecast of 3.1% for 2025-26 (Apr-Mar), remaining well below the central bank's 4% target. The goods and services tax rate rationalisation, set to come into effect next week, will also draw down monthly inflation prints by 30-60 bps. In August, India's CPI inflation rose to 2.07% from 1.61% in July.

"The one-year swap is already showing a rate cut in December, if you fiddle around with the (overnight MIBOR) fixing," a dealer at a private-sector bank said. "There is a sense in the market that the RBI could act, it needs to support growth too if the fiscal (government) is doing so much, all while being relatively non-inflationary."

Traders kept a close eye on the overnight Mumbai Interbank Outright Rate, the floating leg of the OIS contract. They had begun pricing in the overnight MIBOR fixing of around 5.40% in recent days, which had led to swap rates maturing up to nine months easing. Over the past two days, the fixing had risen to 5.48% after 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 in the next week, dealers said.

On the global front, the US panel is universally expected to cut rates at least 25 bps Wednesday, with Fed funds futures pricing in around a 4% chance of a surprise 50 bps move. Traders expect 75 basis points of rate cuts in the US for the rest of 2025 after recent economic data showed 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.

"What really matters to the market is if the RBI turns. The FOMC is already priced in," a dealer at a foreign bank said. "The five-year is also not going anywhere because US yields are where they are and you don't know which direction India's monetary policy (rate) is going, down or up up up."

OUTLOOK

On Wednesday, swaps may open steady on caution ahead of the US FOMC rate decision at 2330 IST, dealers said. Offshore flows are unlikely to be significant 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 around a 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% Wednesday. 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 Deepshikha Bhardwaj

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