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Informist, Thursday, Oct. 9, 2025

 

By Srijita Bose

 

MUMBAI – Most overnight indexed swap rates rose Thursday as overnight money markets rose after the Reserve Bank of India unexpectedly conducted a variable rate reverse repo auction, dealers said. However, rates cooled down later in the day, with some viewing the reaction as exaggerated, as expectations of rate cuts remained afloat, they said. 

 

The one-year swap rate closed at 5.42%, slightly up from 5.41% Wednesday. The five-year swap rate closed at 5.63%, slightly up from 5.62% Wednesday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 309.65 billion, up from INR 267.95 billion in the previous session.

 

At the INR-500-billion overnight VRRR auction, the RBI accepted all bids worth INR 468.60 billion. The overnight Mumbai Interbank Offered Rate - the floating leg in an OIS contract - rose to 5.50% from 5.39% on Wednesday due to the drain in liquidity. 

 

As per the latest RBI data, the liquidity absorbed by the central bank, a proxy for systemic liquidity surplus, was INR 1.29 trillion on Wednesday, down from INR 1.48 trillion Tuesday. Traders had expected the RBI to drain liquidity earlier this week, given the higher banking system liquidity surplus, but since the central bank did not conduct the operation, they expected overnight rates to remain below the repo rate.

 

Traders paid fixed rates to unwind their earlier positions, dealers said. Some traders were also uncertain whether the central bank would cut the repo rate in its next Monetary Policy Committee meeting in December, after the RBI conducted a VRRR auction for the first time in nearly a month, even as the liquidity surplus on Wednesday had reduced slightly from the previous day. 

 

"People had received short-end while selling some gilts since the liquidity was supported, so today they shed those positions," a dealer at a private sector bank said. "There is also some rise because now that the RBI has intervened, they are reading it as uncertainty on rate cuts."

 

However, swap rates eased later in the day, settling off highs as traders felt the initial reaction was slightly overdone. Traders still hope for further rate cuts by the Monetary Policy Committee, and expect swap rates to ease, dealers said. 

 

On the global front, the minutes of the Federal Open Market Committee's meeting in September did not provide significant market cues. Officials expected two additional 25-basis-point cuts by the year-end. But they also pointed to division on the committee, with six of the 19 participants projecting one or no cuts in 2025. Many members also expressed caution, driven by concerns about inflation. The yield on the 10-year US Treasury note rose to 4.14%, higher than 4.10% at 1700 IST Wednesday.

 

"There is still expectation of domestic rate cuts, so we are not really tracking US yields as closely," a dealer at a primary dealership said. 

 

OUTLOOK

On Friday, swap rates may take cues from the movement in US Treasury yields. Any movement in overnight money market rates will also lend cues to swaps, dealers said. Any sharp movement in gilt yield could also lend cues to OIS rates, they said.

 

Traders will watch out for any further fine-tuning of liquidity operations by the RBI, dealers said. Traders may continue receiving fixed rates and ramp up bets of one or more rate cuts in December and beyond after the MPC signalled that low inflation had opened space for policy easing, dealers said.

 

On the global front, traders may track developments in the US after the government partially shut down last week. Traders may take cues from geopolitical developments, especially on India-US trade talks.

 

Swaps may also track the movement of 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%.

 

	At 1700 IST	WEDNESDAY
1-year OIS	5.42%	5.41%
2-year OIS	5.36%	5.35%
5-year OIS	5.63%	5.62%
2-year MIFOR	5.82%	5.80%
5-year MIFOR	6.21%	6.18%

 

End

 

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

 

Edited by Saji George Titus

 

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