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Informist, Friday, Sept. 19, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates across tenures fell slightly as traders placed bets on the Reserve Bank of India's Monetary Policy Committee cutting the policy repo rate of 5.50% at its Sept. 29-Oct. 1 policy meeting, dealers said. This was despite a lack of fresh cues on domestic interest rates, and a rise in US Treasury yields overnight.

"It looks like a set of traders are building positions for an October rate cut," a dealer at a primary dealership said. "The RBI has held meetings with FIMMDA (Fixed Income Money Market and Derivatives Association of India) and economists this week before policy, maybe one of them saw a signal."

The one-year swap rate ended at 5.45%, against 5.47% at Thursday's close. The five-year swap rate ended at 5.71% against 5.72% Thursday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 349.60 billion, up from INR 213.75 billion the previous session.

Offshore traders, who have been consistently receiving fixed rates over the past month, were reworking their risk appetite on India's swap rates, dealers said. US Federal Reserve Chair Jerome Powell said that "there are no risk-free paths now" after the US Federal Open Market Committee's policy outcome this week, with his comments also leading to a rise in US yields. US Treasury yields rose further overnight after weekly initial jobless claims, released after Indian market hours Thursday, fell sharply from the previous week and were lower than estimated. This led to the 10-year US yield climbing to 4.14% at 1700 IST Friday from 4.07% Thursday.

In the interim, domestic traders had stepped up to receive fixed rates, and have already priced in a 25-bps policy rate cut in December. Traders were keen to bet that India's rate-setting panel might warm up to more rate cuts sooner rather than later as CPI inflation is likely to stay below the RBI's 3.1% average forecast for 2024-25 (Apr-Mar), dealers said. The MPC had cut the repo rate by 100 basis points between February and June, before changing its policy stance to neutral and holding rates in August.

Moreover, some traders unwound their "reverse bond-swap" positions, where they had received fixed rates in OIS and sold government bonds. Government bonds may outperform the movement in swap rates after Bloomberg Index Services Ltd. Thursday sought feedback from investors on whether to include India's fully accessible route bonds in its Global Aggregate Index, dealers said. This is the index provider's flagship index for global investment grade debt and the foreign inflows into gilts could be significant if India gets included in the index, they said. While OIS rates may fall less than gilt yields, it will take at least 12 months for India's inclusion, and so it added to positive sentiment rather than any trading bets in the swap market, dealers said.

"The Bloomberg news is holding the offshore guys in balance. Even if it'll take a long time to play out, it is a positive", a dealer at a private-sector bank. "On any other day, at least OIS would have reacted to US yields, but not today (Friday)."

OUTLOOK

OIS rates are not traded Saturday. On Monday, swaps may take cues from the movement in US Treasury yields. Traders said there were no scheduled triggers on interest rates in India until the MPC meet begins at the end of September, dealers said.

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, with domestic traders also amping up their bets in the run-up to the domestic policy review, 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 5.40-5.55% Monday. The five-year contract is seen at 5.62-5.80%.

End

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

Edited by Deepshikha Bhardwaj

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