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Informist, Tuesday, Jan. 7, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended slightly lower Tuesday due to a large offshore entity consistently receiving fixed rates, dealers said. The offshore activity was concentrated in the two-year contract, but led to downward pressure in swaps across maturities.

The one-year swap rate ended at 6.47%, against 6.48% on Monday. The five-year swap rate settled at 6.16%, against 6.18% the previous day.

"A Brazilian hedge fund has been receiving the two-year OIS since yesterday (Monday)," a dealer at a primary dealership said. "The rest of the market is trying to get out of the trade as soon as possible, because last time this player came onto the market, everyone got burnt."

The last time the same Brazilian hedge fund was active in India's OIS market was in 2022, when it had paid fixed rates betting on India's terminal repo rate to be much higher than the eventual top of 6.50% hit in February 2023, dealers said. The quantum of trades taken at the time made the market cautious on betting on the opposite side of the hedge fund now.  The two-year swap rate fell the most on Tuesday.

The five-year OIS rate ended off lows as some traders were disappointed that the first advance estimate of India's 2024-25 (Apr-Mar) GDP growth did not give more certainty of a repo rate cut by the Reserve Bank of India's Monetary Policy Committee. The data, released at 1600 IST, showed India's GDP growth would slow to a four-year low of 6.4%, in line with the median of an Informist poll. Dealers still said the policy has the potential for a rate cut, after the Monetary Policy Committee had already softened its stance in October amid flagging growth. 

While the optimism on lower GDP growth would only solidify near-term rate cut bets, traders had placed bets largely in the five-year OIS due to the higher liquidity and possible gains, dealers said. Some traders also unwound their received fixed rate bets at the day's lows. The five-year OIS had fallen to 6.14%, the lowest since Dec. 18. Traders also continued unwinding their paid fixed rate bets in the five-year OIS after an overnight rise in US yields did not have any impact on the OIS market at the open, dealers said.

Meanwhile, swap contracts maturing up to one year did not fall as much as longer-term swap rates due to tight banking system liquidity, dealers said. This pushed the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – to 6.90%, well above the policy repo rate. Short-term swap rates are more sensitive to overnight underlying rates due to their shorter tenures, and the one- and two-month swap rates inched up. Some traders welcomed the fall in the one-year OIS, and said it now accurately reflected the 50-50 rate cut chance seen at the February RBI policy meeting.

"The underlying is going one way and the OIS is going another. The problem is with MIBOR, and MIBOR is being set higher much longer than the market had expected around this period," a dealer at a private bank said.

OUTLOOK

On Wednesday, swap rates may take cues from the movement of US yields after the Job Openings and Labor Turnover Survey for November is released by the US government, dealers said. Traders also look ahead to the US December employment report for cues on interest rate cuts in the world's largest economy. 

Traders may take cues from these triggers due to a lack of domestic interest-rate triggers until CPI data for December is published next week. 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 Tanima Banerjee

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