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Informist, Wednesday, Sept. 17, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates inched lower ahead of the US Federal Open Market Committee's rate decision due 2330 IST. Some traders received fixed rates, especially in short-term swaps, expecting the US rate-setting panel to signal further rate cuts in 2025, dealers said. This is likely to stoke hopes of the Reserve Bank of India's Monetary Policy Committee also cutting rates this year.

The one-year swap rate ended at 5.46%, against 5.47% at Tuesday's close. The contract is down 7 basis points this month. The five-year swap rate ended at 5.69%, down 10 bps this month, against 5.70% Tuesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 315.50 billion, up from INR 238.85 billion the previous session.

The US FOMC is universally expected to cut interest rates by at least 25 bps, and the impact of the US rate cut is already priced into swaps, dealers said. Some traders took fresh positions before the outcome, betting that the panel would go in for a "jumbo" 50-bp rate cut, its first since December, or signal further rate cuts beyond the 75 bps that the market is pricing in by December.

US Federal Reserve members will give their forecasts of the policy rate by the end of the year in the Summary of Economic Projections, or "dot plot", which will be released with the rate decision. After nine months of a status quo on rates, recent labour market data has rapidly worsened, prompting calls for a rapid lowering of policy rates. The US unemployment rate climbed to 4.3% in August, the highest since October 2021. Traders are not considering a scenario where the FOMC does not cut rates Wednesday, based on Fed Chair Jerome Powell's comments acknowledging the weakness in the labour market in August and sanguine view on inflation.

"The market has been quite lively heading into FOMC, but this is actually one of the policies where that is warranted," a dealer at a foreign bank said. "The baseline is good and the payoff is excellent, so in such a case no one wants to keep limits vacant."

If the FOMC does kickstart a rate-cutting cycle, some traders remain hopeful it will open up room for the RBI to follow suit and ease monetary policy. While inflation is poised to rise in the coming months, 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.

The 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, citing forecasts that show CPI inflation slightly above the RBI's target of 4% and GDP growth about 6.5% in Apr-Jun next year. 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.

These bets have been rekindled by the US policy easing and short-term swap rates are fully pricing in a 25-bp rate cut by the Monetary Policy Committee at its December meeting. Instead of October, the rate-cut bets are concentrated in December as that meeting will come after another GDP print, dealers said. India's GDP data for the September quarter is set for release on Nov. 28.

"There are positions open in both long- and short-term swaps," a dealer at a private-sector bank said. "The five-year OIS will only move if US rates come down, but up to one-year (OIS rates) will start reacting in case there is anything that gives hopes of an RBI rate cut."

OUTLOOK

Thursday, swaps may take cues from the rate decision, commentary, and outlook at the FOMC, dealers said. 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 6% chance of a 50-bp rate cut, according to the CME FedWatch tool.

Traders remain uncertain about further rate cuts in India but may ramp up their bets if they see a consistent US rate cut cycle, which could open up room for the RBI's Monetary Policy Committee to also cut rates in October or December. 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 US tariffs on Indian goods. Recent positive comments on a trade deal and a thaw signalled by the leaders of the two countries augur well for swap rates to shed some risk premium due to the tariffs while also attracting more offshore traders, dealers said.

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 5.35-5.55% Thursday. The five-year contract is seen at 5.60-5.76%.

End

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

Edited by Rajeev Pai

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