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Informist, Friday, Jan. 17, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended slightly higher, with the five-year contract reversing from lows. In early trade, swap rates tracked the overnight fall in US Treasury yields, which was quickly wiped out due to domestic traders paying fixed rates for bond-forward rate agreements, dealers said. Near the close, some traders paid fixed rates before US president-elect Donald Trump's swearing in on Monday.

The one-year swap rate ended at 6.47%, against 6.44% Thursday. The five-year swap rate settled at 6.24%, against 6.23% the previous day. 

The yield on the 10-year US Treasury note fell to 4.59% at 1700 IST from 4.67% at the close of Indian market hours Thursday. US yields fell after Federal Reserve Governor Christopher Waller told news channel CNBC that if inflation in the US continued to cool, the US Federal Open Market Committee could cut rates in the first half of 2025. Waller also did not entirely rule out a cut in March. The comments came against the backdrop of US yields rising since December after the FOMC's forecast for rate cuts this year reduced the quantum to 50 basis points from 100 bps projected earlier.

Tracking the fall in US yields, traders received fixed rates in the five-year swap rates, but the fall was limited as traders unwound some received positions, dealers said. At the day's low of 6.21%, the five-year OIS rate had fallen by 15 bps from Monday's close, similar to the fall in the 10-year US yield over the same period. Moreover, due to uncertainty on the rate cut scenario in India, dealers said swap rates did not move in tandem with US yields on Thursday.

"For the past two days, swap rates are definitely not moving as much as US Treasury yields. They (US markets) are at least pricing in two rate cuts this year. On our side (in India) we're not even pricing in one rate cut for sure, so our rates are muted," a dealer at another private bank said.

The two- and five-year swap rates rose from lows soon after as traders who entered bond forward-rate agreements with life insurers paid fixed rates to hedge their interest rate risk. At the INR-360-billion gilt auction held at 1030-1130 IST, around INR 40 billion worth of the longer tenure 7.09%, 2054 bond was bid at through forward-rate agreements, dealers said.

For most of the day, swap rates moved in a thin band as the near-term view on rate cuts and liquidity was uncertain. Unlike gilt traders who were optimistic of the Reserve Bank of India announcing the purchase of gilts through open market operations, the swaps market was not pricing in any near-term infusion of durable liquidity by the RBI, dealers said. On Thursday, a Bloomberg report said that the central bank may conduct open market gilt buys, long-term dollar-rupee buy/sell swaps, or a cash reserve ratio cut as part of its durable liquidity infusion. 

Some dealers said the RBI was unlikely to introduce any long-term liquidity measures until the Monetary Policy Committee's meeting in February. Others said such a measure would likely be postponed because of the RBI's announcement of daily variable rate repo auctions on Wednesday. 

"There's a quite a lot of noise in the market related to currency and what will happen on that, and generally related to policy and all to watch for," a dealer at a private bank said. "So on both the sides, the range (on the 5-year swap rate) is capped at 6.18%-6.30%."

Traders were also cautious ahead of the swearing-in of incoming US President Donald Trump on Monday. Trump's proposed tariffs are seen as inflationary, which could slow down the pace of the rate cut cycle by the US Federal Open Market Committee, thereby impeding the same in India, dealers said. This led to some traders paying fixed rates in the most-liquid nine-month and one-year segments. 

OUTLOOK

Swaps are not traded Saturday. On Monday, swap rates will take cues from the movement in US yields over the weekend. Any announcement from the RBI, such as the Weekly Statistical Supplement or infusion of durable liquidity could also lend cues, dealers said. Any such announcement will also lead to rates falling sharply, particularly on shorter tenures, dealers said.

The swearing-in of Donald Trump on Monday will also be awaited. The movement in crude oil prices may also lend direction. The swap rate in the one-year segment is seen at 6.40-6.56% and in the five-year segment at 6.18-6.30%.

End

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

Edited by Akul Nishant Akhoury

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