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Informist, Wednesday, Jan. 22, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower on building expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee in February, dealers said. A fall in US Treasury yields also pulled down swap rates, as fears of new US President Donald Trump's policies having an immediate impact on emerging market economies subsided.  

The one-year swap rate ended at 6.40%, against 6.43% on Tuesday. The five-year swap rate settled at 6.17%, against 6.19% the previous day.

Traders received OIS contracts maturing in one year or less on expectations of a 25-basis-point rate cut by the MPC at its upcoming meeting, especially with the rupee stemming the consistent decline seen between November and early January, dealers said. On Wednesday, the rupee settled at 86.3225 against the dollar, against 86.5775 at close on the previous day.

Others expect the RBI to announce durable liquidity measures with another cut in the cash reserve ratio or an open market purchase of gilts, dealers said. Any announcement on these measures will also bring down the overnight Mumbai Interbank Offered Rate and give certainty to traders that the floating leg of the swap contract will be set consistently near the policy repo rate of 6.50%.

"Earlier, it (volume in short-term swaps) was high because of the MIBOR fixing, which was coming in at much higher levels like 6.85%, 6.90%, even 7%," a dealer at a private bank said. "Now, it's because of daily compounding of MIBOR, now its 6.60%, tomorrow it could be 6.55%, 6.50%...daily compounding of MIBOR is getting priced in two-month, three-month OIS, and so people find it lucrative to receive at these levels."

Some traders see GDP growth for the current financial year ending March to be lower than 6.0%, against the advance estimate of 6.4% from the statistics ministry. Traders expect the government's gross borrowing in FY26 to be slightly lower than the INR 14.01 trillion in the current fiscal year due to lower spending by the government in view of the Lok Sabha elections during the year. The positives were showing primarily in the government bond market, but would also trickle down to OIS near the Union Budget on Feb. 1, dealers said.

Meanwhile, the yield on the 10-year benchmark US Treasury note slightly eased to 4.57% at 1700 IST from 4.59% on Tuesday. Traders see US yields falling further as Trump did not immediately push for the additional tariffs he had promised during his election campaign, during the first two days of his tenure, dealers said. With no immediate threat to US inflation, the US FedWatch tool showed hopes of more than 25 bps of rate cuts by the Federal Open Market Committee in 2025 are also resurfacing. This increased the risk appetite for offshore investors in India's swaps market.

"There is a lot of euphoria in the market before the Budget with people expecting lower borrowing and deficit than expected, and that is trickling down to OIS also a bit," a dealer at a private bank said. "In the morning also, the news on the Bloomberg bond index inclusion resulted in some foreign inflows in both gilts and OIS market, but 6.17% (on five-year swap) is also a crucial level and if some big news or structural view change happens then we could see 6.13% levels next."

Comments by Nick Gendron, global head of fixed income index at Bloomberg Index Services, in media reports led to hope of India's inclusion in the Bloomberg Global Aggregate in the coming months, which would spur foreign portfolio investor inflows. In particular, Gendron said that if Bloomberg gets favourable feedback from investors after India's inclusion in its emerging market index starting Jan. 31, there was nothing stopping consultations for the larger global aggregate, according to LiveMint.

OUTLOOK

On Thursday, 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 6.35-6.47% and in the five-year segment at 6.13-6.23%.

End

US$1 = INR 86.32

Edited by Avishek Dutta

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