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Informist, Wednesday, Jan. 15, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended slightly lower on Wednesday, as traders who had been hit with corporate flows on Tuesday continued to receive fixed rates. Swap rates also fell due to a rising rupee and easing money market rates, dealers said. The five-year swap rate was paid by offshore traders on caution before US CPI data due after market hours, limiting its fall.

The one-year swap rate ended at 6.53% against 6.55% Tuesday, while the five-year swap rate settled at 6.28% against 6.29% the previous day. The movement in swap rates was muted, after receiving by corporate entities pulled down both benchmark rates by 7 basis points on Tuesday.

Two state-owned companies were receiving fixed rates Tuesday to hedge their liabilities, dealers said. Due to the sizeable inflows – volumes in swap rates had surged on Tuesday – counterparty traders were left with paid positions across tenures and received fixed rates to minimise their risk. Moreover, with bond yields falling due to investor demand, some traders sold gilts and received OIS rates.

"I think receiving interest came in as there was some investor demand in gilts as well, but no one wants to go aggressive at this point because there are so many major events lined up," a dealer at a private bank said.

The two major events traders looked ahead to was the release of US CPI inflation for December, at 1900 IST Wednesday, and the inauguration of US President Donald Trump on Monday. Trump's economic policies are seen as inflationary, thereby likely slowing down the US Federal Open Market Committee's rate cuts, dealers said. Traders fear the yield on the 10-year US Treasury note may rise to 5% in the coming weeks, which would reflect in the hardening of Indian swap rates.

Domestic traders also received fixed rates as a strengthening rupee brought back expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee in February, dealers said. The rupee rose 27 paise to 86.36 against the dollar at 1530 IST, from 86.63 on Tuesday. A surge in US yields and a slump in the rupee against the dollar on Monday had dashed hopes of a rate cut next month. The weighted average call and triparty repo rates eased below the policy rate of 6.50% on Wednesday, which increased the risk appetite of traders.

The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – fell to 6.50% Wednesday from 7.08% Friday, as the RBI infused liquidity through variable rate repo tenders and dollar-rupee buy/sell swaps, which led to traders receiving near-term swap rates. However, traders wanted more longer-term relief to ease the liquidity deficit--which stood at INR 2.09 trillion on Tuesday--instead of short-term measures.

"We need some permanent relief to increase the liquidity, we need durable liquidity. This VRR (variable rate repo) is only temporary, but yes, overnight rates are easing so swap rates are budging slightly," a dealer at another private bank said.

OUTLOOK

Short-term swap rates may fall sharply on Thursday after the RBI said post market hours it would conduct daily variable rate repo operations. It also allowed primary dealerships to take part in these auctions, which would help anchor overnight money market rates to the repo rate of 6.50%.

The movement of US Treasury yields after the release of US CPI inflation data for December would also provide cues to swaps, dealers said. The data was mixed – headline CPI inflation rose 0.4% on month from 0.3% in November. However, core inflation eased to 0.2% on month from 0.3% over the last few readings. Traders are also looking ahead to Trump's inauguration on Monday for cues.

The movement in crude oil prices may also lend direction. 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 86.3625

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

Edited by Ashish Shirke

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