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Informist, Thursday, Sept. 25, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady Thursday with a downward bias as onshore traders received fixed-rate contracts on bets of the Reserve Bank of India's Monetary Policy Committee setting the stage for a rate cut in December at its meeting outcome Wednesday. Meanwhile, some traders priced in a 25-basis-point rate cut in the next week itself, especially in the one-year swap rate. 

"The odds are in your favour if you're going long into this policy because there is no expectation of anything," a dealer at a private sector bank said. "If it (the MPC outcome) goes bad, how much worse can it get – it'll just be two to three basis points (rise in swaps). And if it goes good, it'll be very very good, huge scope for a rally (fall in swaps)."          

The one-year swap rate ended at 5.46%, flat compared to Wednesday's close. The five-year swap rate closed at 5.73%, flat compared to Wednesday. Both the one-year swap and five-year swap rates have fallen nearly 7 bps so far this month. The trade volume was the highest in the one-year swap at INR 80.15 billion.

Swap traders largely dismissed the overnight rise in US Treasury yields due to expectations of policy easing on the domestic front. Moreover, the yield on the 10-year US Treasury note was not rising above the key level of 4.20%. Traders are still pricing in two more rate cuts of 25 bps each in the rest of 2025 in the US. The 10-year US yield was 4.17% at 1700 IST, up from 4.12% at 1700 IST Wednesday. However, nearing the end of trade, swaps recovered slightly from the fall earlier in the day due to an intraday rise in US yields. 

Onshore traders, and some offshore, positioned for the policy outcome Wednesday, wherein the tone and commentary of the rate-setting panel and that of RBI Governor Sanjay Malhotra is expected to indicate scope for a rate cut of 25 bps in December. Swaps are also pricing in that the central bank will lower its CPI inflation forecast for 2025-26 (Apr-Mar) by anywhere from 20-70 bps, due to the latest rejig in the goods and services tax structure, and a slew of recent prints of headline inflation being below forecasts. 

"Even if real GDP is upgraded, we will be indifferent to it," a dealer at another private sector bank said. "What matters is if he (RBI governor) says anything about nominal GDP. Real GDP was good this time because of the deflator, but nominal GDP could be lower. Any worries on growth or lower nominal GDP is what market is looking for."   

The five-year swap rate has been unable to rise above the 5.73% level recently, and is seen rising to a maximum of 5.80% if the policy outcome on Wednesday is worse than expectations, since swaps are still pricing in at least one more rate cut. Traders were unwinding their bond swap trades Wednesday, but barely any of that reversal was seen Thursday, dealers said. 

OUTLOOK

On Friday, swap rates may open steady due to caution before the MPC begins its three-day policy review Monday, dealers said. Any sharp movement in US Treasury yields may lend cues, though the impact is likely to be muted ahead of the key domestic event.

Traders are now pricing in at least one more rate cut in India. Offshore traders have been largely absent from the swaps market the past two days but may receive 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 also track the movement of gilt yields ahead of the release of the Centre's Oct-Mar borrowing calendar. Citing a source from the finance ministry, Informist reported that the Centre may release the Oct-Mar borrow calendar after 1700 IST Friday. Traders have recently been unwinding their bond swap traders as spreads between the two instruments compressed.   

Traders may take cues from geopolitical developments, especially on US tariffs on Indian goods. 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 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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