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Informist, Tuesday, Jan. 21, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower as traders received fixed rates after newly sworn-in US President Donald Trump did not immediately impose tariffs he had threatened to during his election campaign, dealers said. While the overnight fall in US Treasury yields helped with offshore flows early, domestic traders also unwound their fixed-rate bets. 

The one-year swap rate ended at 6.43%, against 6.45% Monday. The five-year swap rate settled at 6.19%, against 6.23% the previous day.

Trump, who took office on Monday, did not sign any orders imposing tariffs on imports from the rest of the world on the first day. The market had feared the tariff measures, which were expected immediately, would push up US inflation. Trump's acknowledgement of the need to curb inflation was also a relief, dealers said.

The yield on the 10-year US Treasury note fell to a low of 4.53% intraday, from 4.60% at 1700 IST Monday. While the benchmark US yield climbed again by the Indian market close, offshore traders received fixed rates early in the day and did not come back to pay OIS in the latter half, dealers said.

Traders remained cautious about tariffs coming in later, but said the implementation may be measured after the US president's comments, dealers said. Trump said he was planning to implement tariffs of at least 25% on Mexico and Canada by Feb. 1. Trump also said he was thinking of implementing a universal global tariff on all countries but would refrain from doing so as the US wasn't "ready for that yet". With no immediate impact expected on the domestic economy, traders looked at the positives from the next domestic cues lined up: the Union Budget for 2025-26 (Apr-Mar) and the Reserve Bank of India's Monetary Policy Meeting, dealers said.

"The 'Trump-trade' hangover is over, the fear is subsiding," a dealer at a private bank said. "Now hopefully USTs (US yields) have found their support level, and they'll be in this range, so now we can look at the budget and MPC." The 10-year US Treasury yield has risen around 100 basis points since the FOMC started cutting rates in September. 

For Indian bond traders, fears of imported inflation and a slowing rate cut cycle by the Federal Open Market Committee could further delay the onset of the rate cut cycle in India. Most traders expect the Reserve Bank of India's Monetary Policy Committee to cut the repo rate by 25 bps next month, with the five-year swap rate having priced it in, dealers said.  

Expectations of a durable liquidity measure by the RBI and a possible rate cut by the Monetary Policy Committee in February pushed up volumes in the short-term swap tenures this month. On the Clearing Corp. of India's OIS platform, trade volumes in the one-month swap rate have already risen to a record high in January due to the volatility in the contract, with aggressive two-way trade. The overnight Mumbai Interbank Offer Rate has fluctuated wildly through the month between 6.50% and 7.08%, with the upper limit capped by expectations that MPC will cut policy rates next month.

The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract — has consistently stayed above the RBI's repo rate of 6.50% this month as liquidity in the banking system remained in a deficit. On Tuesday the MIBOR settled at 6.61%. 

The five-year swap rate stayed above the key 6.18% level due to a lack of domestic cues. Some paying interest pushed up the swap rate during the day as a bank likely hedged its risk to write a bond-forward rate agreement, dealers said. 

"There was paying in 5-year as there was INR 30 billion-INR 40 billion bond forward rate agreement in the long bond today," a dealer at another private bank said. There were some spread trades between the five-year and 10-year contracts, according to the Rupee Derivatives Dealing System.  

OUTLOOK

On Wednesday, swap rates will take cues from the movement in US yields. Any comments by US President Trump or measures that are seen as inflationary could impact US yields, dealers said. The Union Budget in February and the MPC's meeting after that are the next major domestic cues for traders.

The movement in crude oil prices and the rupee against the dollar may also lend direction. The swap rate in the one-year segment is seen at 6.38-6.50% and in the five-year segment at 6.16-6.25%.

End

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

Edited by Saji George Titus

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