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Informist, Monday, Dec. 1, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates rose for the second straight session Monday as traders unwound their bets on the Reserve Bank of India's Monetary Policy Committee cutting the policy rate on Friday, dealers said. A rise in US Treasury yields also pushed up swap rates and stop-losses triggered in the five-year contract led to them ending at a three-month closing high.

The one-year swap rate ended at 5.49% against 5.46% Friday, up over 7 basis points from last week's lows. The five-year swap rate ended at 5.81% against 5.76% the previous session, up from a low of 5.68% last week. It ended at the highest closing level in three months. The total notional trade volume on Clearing Corp. of India's derivatives trading platform rose to INR 558.85 billion from INR 368.70 billion in the previous session.

Rate cut expectations have swung wildly in the run-up to the Monetary Policy Committee's three-day meeting that begins Wednesday. Until last week, traders were lukewarm about the possibility of a rate cut before RBI Governor Sanjay Malhotra said on Nov. 24 that the central bank had got no signal from the latest economic data that the scope for rate cuts had reduced. This stoked rate cut bets so much so that the one-year swap rate was pricing in a 90% chance of a repo rate reduction to 5.25% in December.

Now, that pricing has slumped to around 20% after higher-than-expected economic growth in the September quarter. India's GDP growth was a six-quarter high of 8.2% in the September quarter, data released Friday showed. Traders had expected a reading as high as 7.5%, above the median 7.2% in an Informist poll of economists. The RBI's forecast for September quarter GDP growth was 7.0% but with the print outpacing all forecasts, traders said the pressure on the Monetary Policy Committee to ease rates had reduced.

"This is the expected reaction to such a GDP print. Why are you surprised?" a dealer at a primary dealership said. "People are either hitting stops (stop-losses) or just ensuring that their portfolio's risk to a no-rate-cut scenario is properly managed."

Traders hit stop-losses on their received fixed rate bets around 5.78% on the five-year OIS rate early in the day, which led to the rate climbing to its three-month high intraday as well. However, it was the two-month contract that was most traded as traders reassessed their near-term rate expectations for this week's meeting and the next one in February, dealers said.

"I was already sure the RBI would not cut rates this time and the market has finally come around to that view after GDP," a dealer at a foreign bank said. "There was generalised paying including because of US yields, but I doubt we will look at it for the rest of the week as MPC will be in focus." The yield on the 10-year benchmark US Treasury note was 4.05% at 1700 IST, up from 4.00% at the same time Friday. 

Some traders held onto bets for a December rate cut citing near-0% inflation in the latest reading. Moreover, they said that the outlook for growth is on a slowing trajectory starting in the December quarter, justifying monetary policy easing. They also said that the Monetary Policy Committee would disregard the recent rupee weakness to cut rates as it was unlikely to have any impact on outflows from India's equity and debt markets.

OUTLOOK

Swap rates may inch higher Tuesday before the Monetary Policy Committee begins its three-day meeting Wednesday. However, traders have largely priced in a status quo at the policy meeting after higher than expected GDP growth in the September quarter and swap rates are unlikely to rise significantly from current levels, dealers said.

The movement of US Treasury yields may also lend cues, especially with US Federal Reserve Chair Jerome Powell scheduled to speak late Monday. However, the impact of the offshore cue may be limited with the Monetary Policy Committee outcome in focus, dealers said.

Traders will also track geopolitical developments, especially those related to the India-US trade deal. Most traders expect more clarity on this front by the month-end. With no recent developments, dealers said a continued 50% tariff on India's exports to the US may also prompt the RBI to ease monetary policy.

The rupee's movement against the dollar is also closely tracked, as some traders fear the rate-settling panel of the RBI may avoid cutting rates in the face of the rupee's recent weakness. The domestic currency hit a record low of 89.7825 a dollar on Monday.

Traders will also track the overnight Mumbai Interbank Outright Rate and crude oil prices for cues, dealers said. The one-year swap rate is seen at 5.38-5.50% and the five-year rate is seen at 5.66-5.75%.

End

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

Edited by Ashish Shirke

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