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Informist, Tuesday, Sept. 30, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended steady ahead of the outcome Wednesday of the Reserve Bank of India's Monetary Policy Committee meeting, dealers said. Most of the trading interest was in short-term swap rates on bets of a cut of 25 basis points in the repo rate to 5.25% at the meeting, though most traders were betting on a December rate cut rather than one this week, they said.

The one-year swap rate ended at 5.46%, against 5.47% Monday. The five-year swap rate closed at 5.75%, unchanged from Monday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 410.85 billion, up sharply from INR 181.80 billion in the previous session. Less than 10% of the volume was in swap rates maturing in two years or more.

"There is a fair bit of optimism in the market about this MPC meeting, but that is already reflecting in the (swap) rates," a dealer at a foreign bank said. "So what do you do? You wait till tomorrow (Wednesday) and hope you're on the side that's making money."

Traders are pricing in a rate cut either in October or in December--the latter is favoured as it will come after the September quarter GDP data, which is expected to show some weakness in the domestic economy. However, some traders ramped up bets on an immediate rate cut as the RBI's rate-setting panel had frontloaded rate cuts earlier and a cut now, in the middle of the festival season, may boost consumption more than one in December, dealers said.

Moreover, the RBI is expected to taper its CPI inflation forecast for the financial year 2025-26 (Apr-Mar) by at least 30 bps from the current 3.1%. With inflation seen well below the central bank's 4% medium-term target, the Monetary Policy Committee may consider it has space to cut the policy rate further, dealers said. RBI Governor Sanjay Malhotra had said monetary policy had little room to support growth after the June meeting of the rate-setting panel. At that time, the panel had cut the policy repo rate by 50 bps as part of its 100 bps of rate easing between February and June.

In a poll by Informist, the majority of economists said the Monetary Policy Committee is likely to keep interest rates on hold for the second consecutive meeting after GDP grew faster than expected in the June quarter. India's GDP growth surged to a five-quarter high of 7.8% on year in Apr-Jun. However, four of the 15 economists polled said they expected a 25-bp rate cut. Since then, one more of the economists--State Bank of India's Soumya Kanti Ghosh--has changed his view to a rate cut in October.

If the committee does not cut rates Wednesday, traders may not lose heart immediately as the tone and commentary of the rate-setting panel and of Governor Malhotra are expected to indicate scope for a rate cut of 25 bps in December. Even with the growth boost from the goods and services tax rejig earlier this month, India's GDP growth in FY26 and beyond is seen much lower than the aspirational rate of 7.5-8.0% put forward by Malhotra, dealers said.

OUTLOOK

On Wednesday, swap rates may open steady on caution ahead of RBI Governor Malhotra's speech outlining the Monetary Policy Committee's decision at 1000 IST, dealers said. The panel's decision and the commentary on growth and inflation are likely to determine the movement of swap rates through the day.

Some sections of the market remain uncertain about further rate cuts in India after the US Federal Reserve 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 by December. Some traders ramped up bets on a rate cut Wednesday as well. With such a cut already reflected, comments from the RBI governor signalling further rate cuts may have limited impact on swap rates, though a reduction in India's policy rate to 5.25% Wednesday will send OIS rates tumbling, dealers said. 

Traders may take cues from geopolitical developments, especially regarding US tariffs on Indian goods. Swaps may also track the movement of crude oil prices or US Treasury yields, though the impact would be limited before and after the rate-setting panel's decision, dealers said. 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 Rajeev Pai

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