Informist, Friday, May 9, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower Friday after rising in early trade as traders received fixed rates they had unwound earlier Thursday and Friday on bets of a rate-cut cycle of at least another 50 basis points, dealers said. 

The one-year swap rate ended at 5.63%, down from 5.67% Thursday. The five-year swap ended at 5.66%, down from 5.68% Thursday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 478.25 billion, lower than INR 685.25 billion Thursday.

Swap rates opened higher, with the five-year swap rate at the day's high of 5.73%, the highest level in nearly a month. Traders unwound received bets on fears of the tensions between India and Pakistan escalating into a full-blown conflict. On the intervening night of Thursday and Friday, Pakistani armed forces launched multiple attacks using drones and other munitions along the entire western border, the Indian Army said Friday morning.

"There's risk, with a war we don't know where it will stop, so traders got out of whatever received positions they had," a dealer at a private-sector bank said. "But the moment that fear subsided they began re-initiating their positions."

Traders took the lack of retaliation by India in the first half of the day as a positive. After market hours, Foreign Secretary Vikram Misri said India's response to Islamabad's attempt to target military establishments in India was precise and non-escalatory. Movement in swap rates was largely due to onshore dealers taking positions on views of at least another 50 basis points of cuts in the repo rate in the remainder of 2025, dealers said. Offshore traders were largely on the sidelines, with some taking profits on bets received earlier.

Traders expect the OIS rate curve to steepen further on bets of a frontloading of rate cuts as a military escalation, if sustained, may lead to growth slowing down. The one-year OIS rate closed below the five-year rate Thursday and Friday, and traders bet on the spread between the two swap rates widening, with the short-term rate falling more, dealers said. The rate curve was largely flat, after having been inverted for over two years as traders had been unable to bring forward their rate-cut expectations. With the Reserve Bank of India's Monetary Policy Committee cutting rates twice since February, dealers expect the current rate-cut cycle to wind up by March at the latest.

"Whatever high we had to see, we've already seen that. Now the rate cut story is intact. In the first place, the OIS rates shouldn't have gone that high yesterday (Thursday) and today (Friday)," a trader at a primary dealership said. "Bonds may see some sell-off at the end of the day because of the long weekend, but OIS is unlikely to see that."

Some traders said the one-year swap rate was unlikely to fall significantly since at least two rate cuts by the Reserve Bank of India's rate-setting panel have already been priced in. A move is expected only if there is a case for more cuts than currently estimated, or if expectations of a rate cut of 50 bps at the next meeting grow, they said. State Bank of India Research said in a note earlier this week that falling inflation could necessitate a cut of 50 bps in the next two meetings to show urgency.

Swaps maturing in less than a year fell slightly on sustained rate-cut bets and surplus liquidity in the banking system, dealers said. Volumes in these tenures, however, were thin. Volumes in the three-month swap rate remained high, as seen Thursday, as it matures just after the rate-setting panel's June and August meetings, dealers said.

OUTLOOK

Swaps are not traded Saturday. RBI-administered markets are shut Monday for Buddha Purnima. On Tuesday, swap rates will be driven by developments on the India-Pakistan front, dealers said. Traders are on the alert for any further escalation after the nuclear-armed neighbours ramped up military activity on the border Thursday. Foreign Secretary Vikram Misri held a press briefing after market hours Friday and said India responded "responsibly and sufficiently" to Pakistan's attack Thursday night, suggesting that India would not try to escalate the conflict.

Traders will track the movement of the overnight Mumbai Interbank Offer Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.50-5.75% Monday. The five-year contract is also seen in the 5.50-5.75% range.

End

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

Edited by Rajeev Pai

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