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Informist, Wednesday, Dec. 10, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended flat on caution ahead of the US Federal Open Market Committee rate decision at 0030 IST Thursday, dealers said. Swap rates had fallen earlier Wednesday after rising sharply the past two days on the view that there would be no further rate cuts in India after the Reserve Bank of India's Monetary Policy Committee Friday cut the policy rate by 25 basis points to 5.25%.

The one-year swap rate ended at 5.48%, unchanged from Tuesday's close. The five-year swap rate ended at 5.97% against 5.96% Tuesday, its highest closing level since Mar. 13. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 371.50 billion, similar to INR 354.20 billion Tuesday.

Fed fund futures are pricing in a 90% chance of a 25-bp cut in the federal funds rate, according to the CME's FedWatch tool. US Federal Reserve Chair Jerome Powell's comments and Fed officials' estimates of rates at the end of 2026 will be closely watched. Traders fear the US rate-setting panel will not cut rates after December until May, when Powell's term as Fed chair ends. Heading into the rate decision, US yields remained near 4.20% at 1700 IST, up 19 bps this month, after the Job Openings and Labor Turnover Survey released Tuesday indicated the job market was fundamentally steady in October, even as hiring remained subdued.

"Offshore was quiet in the morning, then they started paying again," a dealer at a private-sector bank said. "Nobody would want to take open positions in the face of the event risk."

The five-year swap rate had fallen to as low as 5.92% intraday with domestic traders taking advantage of the multi-month highs to receive fixed rates, with some being of the view that the recent rise was overblown. The overnight Mumbai Interbank Outright Rate--the floating leg of the OIS contract--has been set below the RBI's repo rate of 5.25% and is expected to remain there following the central bank's announcement of durable liquidity infusion December. Traders continued to unwind bond-swap trades--selling gilts and receiving OIS rates--because of the recent narrowing of the spread between the two instruments, dealers said.

Meanwhile, the one- and two-year swap rates were still reflecting the view that there would be no further rate cuts in India despite RBI Governor Sanjay Malhotra not closing the door on further policy easing at the post-policy press conference last week. Instead, swap rates had begun pricing in reversal of the rate-cut cycle, dealers said. The benchmark one-year swap had begun factoring in chances of a rate hike in the December quarter of 2026.

"The OIS market has run ahead in terms of positioning, but that is its job," a dealer at a foreign bank said. "If the FOMC signals a split decision or outlook then we could see an even greater rate risk in India and 6% (on the five-year benchmark) could be tested. But after this technical level, the next one is directly around 6.12%."
 

OUTLOOK

On Thursday, swap rates will open tracking overnight movement in US Treasury yields after the US FOMC outcome and release of the Summary of Economic Projections at 0030 IST, dealers said. Offshore flows are likely to continue to drive movement in OIS rates amid a lack of interest rate cues on the domestic front since the Monetary Policy Committee's repo rate cut Friday.

India's CPI inflation for November is the next domestic cue on traders' radar, due Friday. However, traders are more focused on the CPI prints from January onwards, with the RBI projecting retail inflation to average 0.6% in the December quarter. Another cut in the repo rate is seen to be unlikely at this stage unless India's GDP growth slumps, dealers said.

Traders will also track geopolitical developments, especially those related to the India-US trade deal, and movement in crude oil prices. The one-year swap rate is seen at 5.40-5.55% and the five-year rate is seen at 5.85-6.02%.

End

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

Edited by Rajeev Pai

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