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Informist, Thursday, Oct. 23, 2025

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates rose sharply Thursday as traders unwound their bets on a December rate cut by the Reserve Bank of India's Monetary Policy Committee. Hope of that rate cut, which has been fully priced in for the most part since early September, was tarnished after reports that India and the US were making progress on trade deal, dealers said.

 

"Traders have readjusted their risk profile since the news on the trade deal has completely flipped and become positive," a dealer at a private-sector bank said. "If there are steps being taken towards a trade deal, then it is absolutely necessary to re-assess whether (a rate cut in) December will happen or not."

 

The one-year swap rate closed at 5.47%, up from 5.42% Monday. The five-year swap closed at 5.67% against 5.61% Monday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 399.55 billion, against INR 146.00 billion on Monday. Money markets were closed on Tuesday and Wednesday on account of Diwali.

 

The US has imposed a 50% tariff on India's exports since late August, which led the RBI to bring down its GDP growth forecasts for India starting in Oct-Dec and fuelled hopes of further policy easing. Earlier this week, Mint newspaper reported, citing people aware of the matter, that India and the US were approaching a trade deal with a potential reduction in the tariff to 15-16%. The contours of such a deal reportedly have India cutting off Russian oil imports, which rebounded in September, and allowing import of US-grown genetically modified corn and soybean.

 

Following that, US President Donald Trump told media that India would not buy "much oil from Russia" after a call with Prime Minister Narendra Modi Wednesday. This was a softer comment than his earlier remarks that India would not buy crude oil from Russia at all, and was seen as a sign of both sides moving ahead with negotiations. A Reliance Industries spokesperson also said early Thursday that India's largest crude refiner is "recalibrating" its Russian oil imports to align with the Indian government's guidelines.

At its last policy meeting, the MPC unanimously held the policy repo rate at 5.50%, and traders said the minutes showed the intention to have a growth-supportive policy while at the same time not committing to further rate cuts. However, with the RBI's real GDP growth forecast for 2025-26 (Apr-Mar) revised up 30 basis points to 6.8% at that meeting and potential tailwinds from a trade deal, traders were uncertain that even external members who seemed in favour of cutting rates would now vote for a rate cut, dealers said.

 

However, some dealers said the reaction in the swap market may have been overblown as several traders were on leave around Diwali. Also, there is no government bond auction this week.

 

Some traders also noted the fall in the 10-year US Treasury note to 3.99% at 1700 IST Thursday from 4.03% at the close of Indian market hours Monday, which made it favourable to receive the five-year swap rate, dealers said. Moreover, swap rates were still factoring in an over 70% chance of a 25-basis-point rate reduction in December as India's CPI inflation is expected to trend towards 0% in parts of Oct-Dec. 

 

"The rates may rise a handful of basis points from here, but even if a trade deal is announced now, there is limited scope for a rise," a dealer at another private-sector bank said, pegged the top of the range at 5.74%. "I think it may be a good time to receive, especially in the five-year swap, as US yields are constantly testing the lower bounds (of the recent range)." 

 

OUTLOOK

On Friday, swaps may take cues from the movement of US Treasury yields and developments on the India-US trade talks. Trading activity may be limited if there are no fresh cues as some traders may remain absent from desks around the Diwali festival, but may be more volatile if further news points emerge, dealers said.

 

Economists project October CPI inflation at less than 1%, the lowest in the current series with 2012 as the base year. This is likely to put pressure on the Monetary Policy Committee to ease rates further. A December rate cut was fully priced into the one-year swap rate for several weeks before positivity in the India-US trade talks is seen pushing up growth and weakening the case for policy easing, dealers said.

 

Some traders were also awaiting the delayed release of the US CPI report for September, now to be released Friday after Indian market hours. There is no immediate data scheduled on the domestic front that is likely to have a significant impact on swap rates, dealers said.

 

Swaps may also track the movement of the rupee against the dollar and of crude oil prices. The one-year swap rate is seen in the range of 5.38-5.52% and the five-year contract at 5.55-5.74%.

 

	At 1700 IST	MONDAY
1-year OIS	5.47%	5.42%
2-year OIS	5.41%	5.36%
5-year OIS	5.67%	5.61%
2-year MIFOR	5.82%	5.80%
5-year MIFOR	6.24%	6.22%

 

End

 

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

 

Edited by Deepshikha Bhardwaj

 

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