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Informist, Friday, Jan. 10, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher Friday as offshore traders paid fixed rates near the end of Indian market hours, ahead of the release of the US employment report for December at 1900 IST, dealers said. Some traders were of the view the data would weaken the case for rate cuts in the world's largest economy.

The one-year swap rate ended at 6.52%, against 6.50% Thursday. The five-year swap rate settled at 6.23%, against 6.20% on Thursday.

Traders paid fixed rates on the view that US non-farm payrolls in December, a key data point for the US Federal Open Market Committee's rate decisions, would be higher than the consensus estimate of around 155,000 jobs. Moreover, the yield on the 10-year US Treasury note rose to 4.70% at 1700 IST, up 2 basis points from earlier in the day.

"There was both domestic and offshore paying today (Friday), mostly because of NFP (US non-farm payrolls)," a dealer at a private bank said. "I think it became mostly offshore near the close, because US yields also started moving up." After market hours, the US data release showed that jobs added were much higher than expected, as traders had bet on.

Swap rates maturing under one year also continued to see paying pressure caused by tight banking system liquidity, dealers said. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – rose to 7.08%, well above the policy repo rate of 6.50%. On Thursday, the net liquidity injected by the Reserve Bank of India--a proxy for systemic liquidity conditions--rose to INR 2.01 trillion against INR 1.82 trillion on Wednesday. Liquidity remains under pressure due to the central bank's intervention in the foreign exchange market.

This led to a surge in short-term swap rates on Thursday. Traders took advantage of the rise in rates to receive the one-month and three-month swap rates, betting on the Reserve Bank of India infusing durable liquidity in the banking system and its Monetary Policy Committee cutting the repo rate in February, dealers said. The hopes of liquidity infusion increased after the RBI conducted two variable rate repos on Friday, and after treasury heads' meeting with central bankers.

Treasury officials told Informist that select banks and primary dealers met RBI officials on Thursday after market hours in regard to liquidity. Market participants suggested open market operations, a cash reserve ratio cut and a long-term dollar-rupee buy-sell swap among the durable measures for liquidity injection, sources said.

"MIBOR was up, but I think banks have started receiving at the current rate, because they expect some changes in the liquidity strategy after yesterday's (Thursday's) meeting," a dealer at a primary dealership said.

OUTLOOK

Swap rates are not traded on Saturday. On Monday, swap rates may take cues from the movement of US Treasury yields after the release of the US employment report in December, which initially weakened hopes of US rate cuts.

US non-farm payrolls grew by 256,000 in December, against a consensus estimate of 155,000 from the Wall Street Journal. The unemployment rate fell to 4.1% from 4.2% the previous month. The 10-year US yield rose to as high as 4.79% after the data, the highest since November 2023. This is likely to lead to a rise in the five-year OIS rate on Monday, and it will test the psychologically crucial 6.26% mark, dealers said. 

Traders may avoid large bets, despite the significant offshore cues, ahead of India's CPI inflation data for December at 1600 IST on Monday. An Informist poll of 15 economists estimated inflation to fall to a four-month low of 5.3% last month, against a 5.48% print in November.

Any geopolitical cues over the weekend or a further rise in crude oil prices above $80 a barrel may also lend cues.  The swap rate in the one-year segment is seen at 6.45-6.60% and in the five-year segment at 6.10-6.30%.

End

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

Edited by Tanima Banerjee

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