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Informist, Tuesday, Sept. 23, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady Tuesday due to lack of significant domestic triggers on interest rates. Trade volumes remained healthy, especially in short-term swaps, as market participants placed bets on the outcome of the Reserve Bank of India's Monetary Policy Committee meeting next week, dealers said.

The one-year swap rate ended at 5.46%, against 5.45% at close Monday. The five-year swap rate closed at 5.72%, flat from Monday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 298.90 billion, down from INR 390.65 billion the previous session.

The one-year swap rate was the most-traded contract Tuesday. Currently, OIS rates reflect a 25-basis-point cut in the repo rate of 5.50% in Oct-Dec, though the expectation is split. A minority section of the market sees a rate cut at next week's MPC outcome. Others are less convinced, especially with real GDP growth rising to a five-quarter high of 7.8% in the June quarter. Consequently, traders await the September quarter GDP print – to be released at November end – to show signs of weakness in the economy before the December policy review.

"I think the little bit of paying pressure just came in as people are trying to get their positions right before the MPC outcome," a dealer at a foreign bank said. "The market definitely has a whiff of dovishness in it, but the RBI has chosen to be a contrarian in August. We're hoping he doesn't continue this attitude."

When pricing in rate cut bets, traders still assume that the overnight Mumbai Interbank Outright Rate fixing – the floating portion of the OIS contract – will be set at 5.40-5.50%. The overnight MIBOR has exceeded the repo rate for the past week due to sustained tax outflows driving down systemic liquidity, which fell to a deficit for the first time since Mar. 28.

Dealers said the movement of US Treasury yields did not have much of an impact on domestic swap rates, though some traders were cautious before US Federal Reserve Chair Jerome Powell's speech after Indian market hours. The focus is firmly on domestic rate cuts as the US Federal Open Market Committee's outcome was just last week and the US panel had cut rates for the first time in nine months, while also guiding for more rate cuts in 2025. Traders were hoping for a similar guidance from the RBI, though they were pricing in only a 25-bps reduction in the policy rate repo currently.

"The market has been dull for the past two days," a dealer at a primary dealership said. "While I don't expect a rate cut in October, the one-year OIS is not showing anything beyond a single rate cut even by December. So there is no excess for the market to reverse from." 

OUTLOOK

On Wednesday, swap rates may open steady due to lack of significant cues scheduled before the MPC begins its three-day policy review Monday, dealers said. A sharp movement in US Treasury yields after Powell's speech may lend cues, though the impact is likely to be muted ahead of the key domestic event.

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 rate cut of 25 bps in India during 2025. 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 next week, 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 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% and 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 Ashish Shirke

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