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Informist, Tuesday, Jan. 14, 2025

By Srijita Bose and Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended lower on Tuesday as corporate houses received fixed rates across tenures, dealers said. Offshore paying interest also cooled off, though volumes surged on two-way trade on caution before US President-elect Donald Trump's inauguration on Monday.

The one-year swap rate ended at 6.55% against 6.62% Monday, while the five-year swap rate settled at 6.29% against 6.36% the previous day, after rising in early trade. The benchmark swap rates had risen to multi-month highs on Monday due to a surge in US Treasury yields and sharp fall in the rupee eroding certainty on rate cuts in India.

The major cause for the fall was incessant receiving by domestic non-banking financial companies, which started around 0930 IST. The corporate houses were likely receiving swap rates to hedge their bond issuances in the future, dealers said. Most of the receiving was by an infrastructure lending public-sector entity, with a power finance company joining in later in the day. The latter had also received fixed rates on Monday.

"The rates in OIS suggest that the market is now pricing in only 25 bps (basis points) of rate cut in the year at most, but today (Tuesday) some receiving interest came in from (a large infrastructure lending institution) is what I heard," a dealer at a private bank said. "There may be other corporate receiving as well, which is why the market was pretty well-behaved."

With the fall in the rupee limited on Tuesday – it fell to a record low of 86.65 a dollar, but depreciated only 6 paise on a closing basis – traders found some relief. On Monday, with a 0.7% fall in the rupee, traders feared the Reserve Bank of India may resort to tightening the monetary policy to prevent a further fall in the rupee. That panic further dissipated after reports quoted sources as saying that new RBI Governor Sanjay Malhotra has signalled that he is open to a more flexible rupee. Malhotra did not express objections to the slump in the rupee during meetings with departments at the central bank, news channel ETNow reported.

Offshore traders likely unwound their paid fixed rate positions earlier in the day as the yield on the 10-year benchmark US Treasury note also eased slightly to 4.77% from 4.79% at 1700 IST on Monday.

Meanwhile, the sharp fall in short-term swap rates was triggered by a fall in the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – to 6.60% Tuesday from 7.00% the previous day. Meanwhile, Brent crude oil for March delivery also eased slightly to $80.68 a barrel at 1700 IST from $81.24 a barrel at the end of Indian market hours on Monday.

The one-month and two-month OIS shot up during the day to over INR 60 billion each on the Anonymous System for Trading in Rupee OTC Interest Rate Derivatives. Traders likely received these contracts with a view of easing liquidity conditions in the upcoming months, on expectations that the central bank may infuse durable liquidity into the market. With the fall in the benchmark one-year swap rate Tuesday, the market was once again fully pricing in a repo rate cut by April, with a small percentage of a February rate cut.

On the other hand, Trump's policies on tariffs and taxes are seen as inflationary, which are feared to push up US yields further. Traders have trimmed their expectations of the number of rate cuts by the Federal Open Market Committee in 2025 after stronger-than-expected jobs data suggested a resilient US economy. Traders will also watch out for US economic data, including CPI and retail sales for December, which are due later this week. 

"Everyone is tracking movement in US yields very closely before Trump, even though right now we are seeing a reversal from Monday's rise, anything can happen after Trump assumes office," a dealer at a primary dealership said. "If he actually stands up to his promises with his policies and the dollar index keeps rising, then we could easily see OIS (rates) rise by at least another 10 basis points."

OUTLOOK

On Wednesday, swap rates may take cues from the movement of US Treasury yields overnight, with traders looking ahead to Trump's inauguration on Jan. 20. Traders await the US producer price index data, scheduled to be released at 1900 IST Tuesday, for cues on the movement of US yields, dealers said.

With recent data showing resilience in the US economy, hopes of rate cuts in the US have been pushed back to the latter half of 2025, which is also seen delaying rate cuts in India. The domestic currency closed at a record closing low of 86.63 to a dollar on Tuesday. The RBI's intervention in the foreign exchange market with dollar sales to support the rupee has put further strain on liquidity in the banking system, which may keep the overnight MIBOR rates above the repo rate of 6.50%, dealers said.

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 86.63

Edited by Ashish Shirke

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