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Informist, Monday, Dec. 30, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady owing to a lack of significant interest rate cues, with trading activity subdued near the year-end. Bets that the Reserve Bank of India's Monetary Policy Committee would cut the policy repo rate of 6.50% in February led to some domestic traders receiving short-term swap rates, dealers said.

The one-year swap rate ended at 6.52%, against 6.53% on Friday. The five-year swap rate settled at 6.22%, against 6.23% the previous day.

"So there is a lot of receiving in the one-year OIS at 6.51-6.53%," a dealer at a private bank said. "That is happening because at that level, the February rate cut is getting almost priced out."

The one-year swap rate still priced in at least 50 basis points of repo rate cuts in the next 12 months, in line with consensus market expectations, dealers said. However, the pricing had been skewed due to tight liquidity conditions in the banking system, which had persistently pushed up the overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--as well, dealers said. For the second straight day, the overnight MIBOR was set at 6.90%, well above the policy repo rate of 6.50%.

While traders said liquidity conditions may improve in the coming days on account of the government's month-end spending, swap traders feared MIBOR may be consistently high as long as the RBI does not infuse durable liquidity into the banking system. The central bank's heavy dollar sales over the past two months have drained durable rupee liquidity from the banking system, and without RBI intervention, traders do not expect the MIBOR will sustain near the policy repo rate even in the next few months.

"Nobody is betting big in any of the markets before the year-end," a dealer at a foreign bank said. "But, most importantly, look at it this way: if the RBI can't guarantee (that) liquidity will be in a comfortable surplus when it is cutting rates, then there is no money you make on receiving at current levels." The one-year swap rate was the most-traded contract on the day.

The five-year swap rate did not get as many traders receiving fixed rates due to an overnight rise in US Treasury yields. The 10-year US Treasury note rose to a high of 4.63%, trading around levels last seen in May. However, it eased to 4.60% by the end of Indian market hours. Traders were optimistic US yields would not rise further until the inauguration of president-elect Donald Trump on Jan. 20. After trading in a thin band over the past few days, US yields--and the five-year OIS rate--would react to whether he goes ahead with his tax and tariff policies that are seen to be inflationary, dealers said.

OUTLOOK

On Tuesday, swap rates will take cues from the movement in US yields, dealers said. The pressure on the rupee could also lead to volatility in rates during the day. 

Trade volumes could be low during the week as several traders are on leave ahead of the New Year. Activity from foreign banks and foreign portfolio investors could also 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

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

Edited by Rajeev Pai

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