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Informist, Monday, Jan. 13, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates shot up on Monday after US Treasury yields rose to multi-month highs after jobs data indicated a resilient economy, dealers said. This, along with a sharp fall in the rupee, wiped out pricing of a rate cut by the Reserve Bank of India's Monetary Policy Committee in February.

The one-year swap rate ended at 6.62%, its highest closing level since Aug. 2, against 6.52% Friday. The five-year swap rate settled at 6.36%, the highest since Jul. 15, against 6.23% the previous day.

Swap rates maturing up to three months have been driven higher due to higher fixings on the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract — which was set at 7%, well above the policy repo rate of 6.50%. However, it was swaps between six months and one year which were capturing at least a 50-bps rate cut cycle in India to start in February. These swap rates shot up due to the pushing back of rate cut hopes in both India and the US.

The yield on the 10-year US Treasury note rose to 4.79% at 1700 IST from 4.70% at the close of the Indian market on Friday. The US employment report for December, released post Indian market hours on Friday, showed non-farm payrolls grew by 256,000, against the Wall Street Journal estimate of 155,000. The data pointed to resilience in the US economy, pushing up US yields as rate cut expectations in the US faded to around 30 basis points in 2025, with the next rate cut only in the latter half of 2025.

Meanwhile, the rupee ended at a record closing low of 86.5750 a dollar on Monday, falling 0.7%, dealers said. The rupee has fallen 1.1% already in January, even ahead of US President-elect Trump's inauguration. Trump's policies are seen as inflationary, driving up both US yields and the dollar index. In the 12 months to October-end, the rupee had only fallen 1%. With the increased pace of depreciation, gilt dealers fear that the RBI would choose to keep liquidity conditions tight to protect a further fall in the rupee and its three members of the MPC would vote to keep the repo rate unchanged.

"The one-year is basically at that level, where we have waved goodbye to rate cuts until August, or at best, June," a dealer at a foreign bank said. "While this was definitely a knee-jerk movement, if you look at the volumes, the market has settled here after hitting whatever stop-losses they could find."

Pricing of rate cuts in India had moved ever closer after inflation seemed to be on a cooling trajectory, while the government's first advance estimate for GDP growth was at a four-year low of 6.4% in 2024-25 (Apr-Mar). Traders hit stop-losses on the one-year swap at around 6.55%, while on the five-year OIS rate, the stop-losses were triggered at 6.26%, dealers said. After the sharp movement early in the day, swap rates had little reaction to India's CPI inflation for December printing along expected lines, at 6.2%.

Offshore traders also paid fixed rates in the five-year swap rates due to a rise in Brent crude oil for March delivery to over the psychologically crucial $80 a barrel. Dealers said the paying was not significant in the context of the day, due to the surge in the five-year OIS because of US yields. Some traders were of the view that current levels were lucrative to receive fixed rates, as negative factors had already been priced in, but were cautious before Trump's inauguration.

"Until Trump comes in, who in the market has the appetite to take the opposite side of the trade?" a dealer at a primary dealership said. "I haven't even built up my positions yet, and then the market moved (over) 10 bps. So you have to be very careful with positioning before the tariffs (expected from the Trump administration) are announced."

OUTLOOK

On Tuesday, swap rates may take cues from the movement of US Treasury yields overnight, with traders looking ahead to Trump's inauguration on Jan. 20. Other US economic data, including CPI and retail sales for December, are due later this week. 

With recent data showing resilience in the US economy, hopes of rate cuts in both the US and India have been pushed back to the latter half of 2025. India's CPI inflation for December, which was on expected lines, also did not make a case for immediate rate cuts with the rupee under pressure, dealers said. The Indian unit fell 0.7% against the dollar Monday to a record closing low of 86.5750 a dollar.

The movement in crude oil prices may also lend cues. The swap rate in the one-year segment is seen at 6.50-6.70% and in the five-year segment at 6.25-6.45%.

End

US$1 = INR 86.58

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

Edited by Ashish Shirke

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