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Informist, Monday, Dec. 23, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower, tracking a fall in US Treasury yields over the weekend, dealers said. The one-year swap rate ended at 6.51%, down from 6.55% Friday. The five-year swap rate settled at 6.19%, against 6.23% the previous day.

The yield on the 10-year US Treasury note eased slightly to 4.54% at the end of Indian market hours Monday, from 4.56% at 1700 IST Friday. Data released after Indian market hours Friday showed the US core personal consumption expenditures rose 0.1% on month in November from 0.3% in October, below the consensus view of a 0.2% rise.

Traders unwound their paid fixed rate bets taken last week, while some received fixed rates as they found OIS rates lucrative after the US data release, dealers said. There were also persisting views of a rate cut in February by the Reserve Bank of India's Monetary Policy Committee. Traders are pricing in two rate cuts by the RBI's panel in 2025.

While the US Federal Reserve's preferred inflation gauge cooled, it is not seen making a material difference on the basis points of rate cuts that US Federal Open Market Committee members have forecast for 2025. Traders were also watchful before US President-elect Donald Trump assumes office on Jan. 20. With higher tariffs and tax cuts, Trump's policies are seen as inflationary for the US economy, which is likely to drive up US yields further. 

"It is a good level to receive, and I think some people overpaid a bit last week, so some interest is also coming in because of that," a dealer at a private bank said. "But the volumes still show caution before Trump comes to office and also because of the upcoming holiday." India's financial markets will be closed Wednesday for Christmas.

Trade volumes on short-tenure contracts rose during the day. Dealers said offshore traders are likely to have received fixed rates on the one-year swap rate and bought short-term gilts.

"Some FPI (foreign portfolio investor) flows came in on the five-year gilt and some other shorter tenure paper as well, so they were also receiving in one-year swap," a dealer at a primary dealership said. "Also some people may be spread-trading, which is also increasing the short-end volumes."

The high overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--is likely to ease slightly in the coming weeks, also leading to fresh interest in receiving fixed rates on short-term swaps, dealers said. The liquidity deficit in the system rose to a seven-month high of INR 1.91 trillion on Saturday, leading to the overnight MIBOR being fixed above the Marginal Standing Facility rate of 6.75% for the 10th straight trading session Monday. Dealers said that with tax outflows out of the way, the government's month-end spending and the INR 600 billion liquidity injection from the second tranche of a cash reserve ratio cut would help ease the MIBOR by Saturday.

OUTLOOK

On Tuesday, swap rates will take cues from the movement in US yields due to the lack of any other data cues in the day, dealers said. Trade volumes could be low during the week as several traders are on leave for Christmas and New Year. Activity from foreign banks and foreign portfolio investors could be muted as they close their accounts at the end of the year, dealers said. 

Tight liquidity conditions in the banking system may result in upward pressure on short-term swap rates. The swap rate in the one-year segment is seen at 6.45-6.65% and in the five-year segment at 6.15-6.30%.

End

Edited by Rajeev Pai

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