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Informist, Monday, Jan. 6, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower due to a late spurt of receiving from offshore investors on a news report that US president-elect Donald Trump's proposed tariffs on other countries may be less harsh than expected. Traders paying fixed rates anticipating US Treasury yields would move higher after Trump's inauguration on Jan. 20 unwound those positions, dealers said. 

The one-year swap rate ended at 6.48%, against 6.51% on Friday. The five-year swap rate settled at 6.18%, against 6.22% the previous day.

"Despite the rise in US yields, there is some receiving from offshore into OIS," a dealer at a private bank said. "Initially, we were not able to make sense of it, but in the last part of it is because of a Wall Street Journal report on tariffs."

Trump's economic policy, which includes promises on tax cuts and tariffs, was seen pushing up US yields due to higher inflation and fiscal deficit in the world's largest economy when he assumed the US presidency. The Washington Post reported Monday that Trump's team is considering universal tariffs but only on certain sectors, citing the incoming president's aides. A fall in the 10-year US Treasury note to 4.60% at 1700 IST from an intraday high of 4.64% also pulled down the five-year OIS rate, dealers said.

Earlier in the day, OIS rates were volatile. They rose in early trade due to a rise in the 10-year US Treasury yield over the weekend after data showed US purchasing managers' indices were higher than expected in December. However, with the five-year OIS rate unable to rise past the crucial 6.26% mark, the offshore flows pulled down the swap rates, dealers said.

As for short-term swaps, rates were anchored by hope the Reserve Bank of India's Monetary Policy Committee would cut rates in February under new RBI Governor Sanjay Malhotra. Easing liquidity conditions also reduced the paying pressure in swap contracts maturing up to one year. The RBI injected INR 289.58 billion into the banking system on Sunday, the lowest required since Dec. 15.

Traders also placed bets that upcoming data on growth and inflation in India may point to a larger quantum of rate cuts, or increase certainty on the February rate cut of 25 basis points, dealers said. The immediate trigger would be the advance estimate for India's GDP growth in 2024-25 (Apr-Mar). India's GDP growth may moderate to a four-year low of 6.5% in the current financial year ending March, with a sharp slowdown in economic activity in the second half of 2024 seen dragging the full-year growth figure down to its lowest level since the contraction witnessed in pandemic-hit FY21, according to the median of an Informist poll.

"You can go ahead and express a view mostly in the five-year swap, which is offering some liquidity, even if you want to trade on short-term growth takeaways," a dealer at a primary dealership said. "There is some optimism there, but with 6.5% (GDP growth) already factored in, how low can it go?"

OUTLOOK

On Tuesday, swap rates may take cues from the movement of US yields. Traders also look ahead to the release of India's first advance GDP estimate for FY25, scheduled for release at 1600 IST, dealers said.

Traders look ahead to US jobs data at the end of the week and domestic CPI data due next week for interest rate cues. The swap rate in the one-year segment is seen at 6.42-6.55% and in the five-year segment at 6.10-6.25%.

End

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

Edited by Deepshikha Bhardwaj

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