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Informist, Monday, Sept. 22, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady Monday due to lack of fresh cues on interest rates. Traders held on to bets that the Reserve Bank of India's Monetary Policy Committee will cut the policy repo rate of 5.50% by at least 25 basis points in either its October or December policy meeting, dealers said.

The one-year swap rate ended at 5.45%, flat against Friday's close. The five-year swap rate closed at 5.72% against 5.71% Friday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 390.65 billion, from INR 349.60 billion the previous session.

Instead of delivering a rate cut next week, traders expect the RBI and MPC to acknowledge some headroom for further monetary policy easing when they announce their decision on Oct. 1. At its previous meeting, the committee's outlook on growth and inflation in the forecasts for Apr-Jun 2026 were seen by traders as overstating inflation risk while understating risks to growth from the US tariffs on India, which at 50% are among the highest in the world.

"The six-month OIS (overnight index swap) is also fully pricing in 25 bps over Oct-Dec," a dealer at a foreign bank said. "So the market seems to be fully positioned on a cut. Now, the ball is firmly in the RBI's court on whether it wants to pivot or stay passive."

Traders said the RBI may also prefer signalling a rate cut before delivering one to maximise the impact of the policy easing measure. Banks' lending rates have fallen since the beginning of the rate cut cycle in February to June, but have firmed up since the August policy outcome when the MPC unanimously held the repo rate at 5.50%.

Even a vote in favour of a rate cut will be seen positively by the market while some traders are outright betting on a 25-bp rate cut next week, dealers said. These expectations have grown after State Bank of India Group Chief Economic Advisor Soumya Kanti Ghosh, in a report earlier Monday, said a quarter percentage point rate cut was the "best possible option" for the RBI.

This kept trading volumes high in swaps maturing up to two years. Meanwhile, the five-year swap rate opened higher but fell back to Friday's closing level nearly immediately in early trade. The consistent rise in the 10-year US Treasury yield was having an impact on swap rates, but traders said they were not tracking the offshore trigger closely ahead of the MPC meeting next week, dealers said. The 10-year US yield rose to 4.15% in early trade but eased to 4.13% by the 1700 IST, similar to its level at the same time Friday.

"The opening trade was a surprise, looks like both to us and to the counterparties who hit that trade," a dealer at a private-sector bank said. "The swap market was relatively calm actually, and yes, there wasn't a lot of offshore activity today (Monday)."

Meanwhile, the rise 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 overnight MIBOR rate has been fixed at 5.58-5.60% since Wednesday, above the policy repo rate. The overnight MIBOR rate is expected to be at the repo rate or higher until Wednesday on tax outflows over the past week, 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 Tuesday, 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, 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 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 in 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 5.62-5.80%.

End

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

Edited by Subhojit Sarkar

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