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Informist, Thursday, Jan. 9, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates maturing in one year or more ended steady Thursday. The near-term swap rates shot up due to tight liquidity in the banking system. The overnight Mumbai Interbank Offer Rate – the floating rate of the OIS contract – was set at 6.99% Thursday. It has been inching closer to 7% over the past two days.

The one-year swap rate ended at 6.50%, flat from Wednesday. The five-year swap rate settled at 6.20%, also unchanged from the previous day. The one-month swap rate was the most volatile contract, jumping 6 basis points to 6.79%, its biggest single-day jump in over a month.

"The pricing now shows that the overnight MIBOR will be set at the MSF (the Reserve Bank of India's Marginal Standing Facility) every day for the next month," a dealer at a private bank said. "It is actually a bit ridiculous that the RBI has allowed liquidity conditions to get this bad that market pricing is so distorted, while a rate cut is still expected."

The persistent tight liquidity – the RBI has had to net inject liquidity every day since Dec. 16 – has come as a surprise to traders. Traders expected the RBI to anchor the overnight MIBOR near the policy repo rate of 6.50% after its Monetary Policy Committee softened its stance to 'neutral' from 'withdrawal of accommodation' in October. Instead, dealers said they now have to time the exit from the tight liquidity regime in addition to bets on policy rate cuts. The six-month swap was the most traded contract and saw notional volumes surge to an over one-month high of INR 73.00 billion.

"The six-month is the crossover point between current MIBOR and say, the 12-month ahead view," a dealer at a primary dealership said. "That is probably why it got this amount of trade – MIBOR is at 7%, and you still have to price in a rate cut cycle starting from 6.50% downward."

While domestic traders were primarily concerned with short-term swap rates, some offshore traders reversed their paid fixed rate positions in the five-year swap rate as US Treasury yields eased overnight. The 10-year US yield cooled slightly to 4.68% at 1700 IST from 4.71% on Wednesday, a level last seen in April. However, with domestic traders still keen to pay OIS due to high overnight rates, the five-year swap rate ended little changed. 

OUTLOOK

On Friday, swap rates may take cues from the overnight movement of US Treasury yields. Traders may receive fixed rates in short-term contracts after the RBI announced it would conduct a 14-day variable rate repo operation for a notified amount of INR 2.25 trillion, which is expected to ease overnight rates.

Traders may also receive fixed rates due to optimism on India's CPI inflation falling in December, with the data due on Monday. Repo rate cut bets for February remained intact, and traders looked to the figure for more certainty on those positions, dealers said. The swap rate in the one-year segment is seen at 6.42-6.55% and in the five-year segment at 6.10-6.26%.

End

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

Edited by Ashish Shirke

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