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Informist, Wednesday, Oct. 1, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates maturing in a year or more ended lower in a volatile trading session, tracking gilt yields after Reserve Bank of India Governor Sanjay Malhotra said that the yield on the 10-year benchmark gilt has scope to fall further. The governor said this at the post-policy press conference, after the MPC held rates steady. Traders interpreted the tone and commentary of Malhotra and the rate-setting panel as they were open to cutting rates further.

The one-year swap rate ended at 5.44%, against 5.46% Tuesday. The five-year swap rate closed at 5.68% from 5.75% Tuesday. The one-year swap rate closed at its lowest since May 2, 2022. The five-year swap rate fell by 7 bps, the most since Aug. 4. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 959.55 billion, more than double from INR 410.85 billion in the previous session. 

Swaps largely swung in a range of 4 basis points during the governor's statement that began at 1000 IST. It was during the post-policy press conference that swaps maturing in a year or so tumbled, when Malhotra said the central bank was watchful of policy transmission to bond yields. Some traders also hit stop-losses at around 5.73% on the five-year swap rate, which led to a further fall to the next technical level of 5.68%. 

"I think stops (stop-losses) got triggered," a dealer at a private sector bank said. "Initially there was a lot of paying at 5.75% (on the 5-year swap) but then 5.73% got taken out and after bonds rallied, it just completely collapsed." The 10-year benchmark 6.33%, 2035 gilt yield fell 6 bps, the most since Aug. 28.

Traders found the governor's statement to give mixed cues on future interest rate cuts. On one hand, the central bank revised down its GDP growth estimates for the second half of 2025-26 (Apr-Mar) and the first quarter of FY27, while it hiked its FY26 GDP growth forecast to 6.8% from 6.5%. On the inflation front, the RBI cut its FY26 CPI inflation forecast to 2.6% from 3.1% earlier, but projected a 4.5% figure for FY27, which is above the RBI's 4% target. However, Malhotra said current macroeconomic conditions and the outlook opened up policy space for further supporting growth. 

Traders held on to their bets of a rate cut in December, especially after external MPC members Nagesh Kumar and Ram Singh were of view that the policy stance should be changed to 'accommodative' from the current stance of 'neutral', which was a positive trigger for rate cut bets, dealers said. A change of stance to 'accommodative' is seen as the ultimate trigger to drive down swaps, traders have said repetitively. Across maturities, the one-year swap rate was traded the most at a turnover of INR 217.90 billion, only rivalling its volume on the June policy outcome. 

"OIS was already pricing in some probability of a cut," a dealer at another private sector bank said. "One-year is already at 5.44%, so if 5.25% is the repo rate also, compounding and there is no further cut then one-year will be at these levels."

However, swaps maturing in less than a year rose, as the tone of the policy was seen more 'neutral' than accomodative, dealers said. Some traders also booked profits, after receiving fixed rate contracts heavily in these tenures in the run-up to the policy outcome, they said. The three-month swap rate ended nearly 5 bps higher at 5.49%. 

OUTLOOK

Indian financial markets are shut Thursday for Mahatma Gandhi Jayanti. On Friday, swap rates may take cues from the movement of US Treasury yields at open. Later in the day, swaps are likely to track the movement of gilt yields as traders fully digest the outcome of the MPC outcome Wednesdsy. Bets of a rate cut in December are likely to ramp up after the governor signalled that low inflation opened space for policy easing. 

On the global front, traders may track developments in the US after the government partially shut down Wednesday. The shutdown may delay Friday's payrolls data, adding relevance to job openings and labour turnover survey and other jobs data. The US Labour Department said in a contingency plan that the Bureau of Labour Statistics will suspend all operations and that economic data that are scheduled to be released during the lapse will not be released if the government shuts down. The ADP data for September showed private-sector jobs fell by 32,000, much lower than the consensus forecast by economists in a Wall Street Journal poll of 45,000 additional jobs.

Traders may take cues from geopolitical developments, especially regarding US tariffs on Indian goods. Swaps may also track the movement in the rupee against the dollar and crude oil prices. The one-year swap rate is seen in the range of 5.40-5.50% and the five-year contract at 5.62-5.73%. 

End

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

Edited by Akul Nishant Akhoury

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