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Informist, Thursday, Sept. 18, 2025

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended higher Thursday, led by the five-year swap, as US Treasury yields rose despite the US Federal Open Market Committee cutting its policy rate for the first time in nine months. Comments from US Federal Reserve officials led some traders to question their bets on a deep or extended US rate-cutting cycle, which would have solidified hopes of further rate cuts in India as well, dealers said.

 

The one-year swap rate ended at 5.47%, against 5.46% at Wednesday's close. The five-year swap rate ended at 5.72% against 5.69% Wednesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 213.75 billion, down from INR 315.50 billion the previous session.

 

"The market was excited and the FOMC just let them down, that's all," a dealer at a foreign bank said. "There is nothing particularly hawkish in the statement or the dots ("dot plot" forecasts), but there's nothing dovish also, and that's what people had positioned for."

 

The US rate-setting panel cut its policy repo rate by 25 basis points to 4.00-4.25%, as near-universally expected, though some traders had received OIS rates Wednesday in hopes of a 50-bps rate cut. US Federal Reserve Chair Jerome Powell's comments after the rate cut suggested the committee did not seriously consider such a jumbo cut at its meeting. He termed the reduction in rates a "risk management cut", and the FOMC justified the cut by highlighting growing signs of weakness in the labour market.

 

In its economic projections, the panel indicated chances of two additional 25-bps rate cuts this year, one in 2026, and another in 2027. The projections for 2025 were exactly in line with market expectations. Despite this, the yield on the benchmark 10-year Treasury note rose to 4.07% as of 1700 IST, higher than 4.02% at 1700 IST Wednesday, and bouncing back from Wednesday's low of 3.99%. The five-year OIS rate rose as traders unwound their received fixed rate positions, dealers said.

 

"The correction in the market hasn't come, people have not really unwound too much except in the five-year," a dealer at a primary dealership said. "The one-year swap is still pricing in a rate cut in December, and no one wants to bet against that because you'll not really make too much money there."

 

While a rate cut at the October meeting seems unlikely after the FOMC didn't accelerate rate cuts, traders still retain hopes of the Reserve Bank of India's Monetary Policy Committee cutting rates in December, dealers said. At that time, domestic factors will make an "undeniable" case for growth and inflation, some dealers said.

 

Traders are betting on the GDP growth data for the September quarter, due Nov. 28, to point to the need for additional monetary policy support. Meanwhile, CPI inflation is expected to be well below the RBI's projection of 3.1% for 2025-26 (Apr-Mar), especially with the goods and services tax rate rationalisation coming into effect next week, dealers said.

 

Meanwhile, the spike in the overnight Mumbai Interbank Outright Rate – the floating rate of the OIS contract – did not lead to traders paying short-term swap rates. The MIBOR rate rose to 5.60% on Thursday, the highest fixing since Aug. 8, from 5.49% on Wednesday. The overnight MIBOR rate is expected to be at the repo rate or higher for the next week in the aftermath of advance tax and income tax outflows, along with upcoming tax outflows for monthly GST payments, dealers said. Traders are still taking positions in the OIS market pricing in an average fixing between 5.40% and 5.45% over the next few months, dealers said.

 

OUTLOOK

On Friday, swaps may take cues from the overnight movement in US Treasury yields, which rose after Indian market hours, dealers said. US weekly initial jobless claims fell sharply from the previous week and were lower than estimated, leading to the 10-year US yield climbing to 4.12% at 1900 IST from 4.07% at 1700 IST.

 

Traders remain uncertain about further rate cuts in India after the US FOMC signalled it would take a slow and steady path to rate cuts, though OIS rates are pricing in a December rate cut of 25 bps in India. 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 5.45-5.55% Friday. The five-year contract is seen at 5.65-5.80%.

 

	At 1700 IST	WEDNESDAY
1-year OIS	5.47%	5.46%
2-year OIS	5.44%	5.43%
5-year OIS	5.72%	5.69%
2-year MIFOR	5.99%	5.97%
5-year MIFOR	6.30%	6.28%

 

End

 

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

 

Edited by Tanima Banerjee

 

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