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Informist, Thursday, Jan. 23, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended off lows as US Treasury yields rose during the day, dealers said. Swap rates were down in early trade as traders put their hopes on a 25-basis-point rate cut by the Reserve Bank of India's Monetary Policy Committee in February.

The one-year swap rate ended at 6.41%, against 6.40% on Wednesday. The five-year swap rate settled at 6.18%, after falling to a low of 6.14%, against 6.17% the previous day.

The yield on the 10-year US Treasury note rose to 4.62% from 4.59% earlier, which pushed up swap rates on the five-year contract, dealers said. As uncertainty over trade and tariff policies by newly sworn-in US President Donald Trump loomed, traders paid fixed rates, tracking the reaction in US yields, they said. This pushed up the five-year swap rate from lows, even as the views on the domestic front remained positive.

"The impact of Trump is still impending, though some people are expecting a soft-landing on his policies and US yields to eventually go down," a dealer at a private bank said. "But today (Thursday), (US) yields went up, so paying interest came in from some segment, though it mostly looks to consolidate at these levels for now." 

On the domestic front, traders were confident of positive takeaways from the Union Budget on Feb. 1 and the monetary policy review the week after. Traders continued to hold onto bets of a repo rate cut in February, as well as the RBI injecting durable liquidity into the banking system soon, dealers said. On Wednesday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 2.88 trillion, its highest in nearly a year. The RBI has been conducting daily variable rate repo operations since last week, which have eased the money market rates but failed to provide durable liquidity, dealers said.

In addition, the hope of a lower market borrowing in the Budget for 2025-26 (Apr-Mar) led traders to unwind some paid fixed rate bets which they had used to hedge their gilt holdings, dealers said. Trade volumes in the one-year contract ballooned due to two-way trade on bets on when repo rate cuts in India would begin. Traders received fixed rates in short-term swap rates on the expectation of further announcements on liquidity measures.

"The OIS market has been relatively well-behaved and did not react as much as gilts in the past few days," a dealer at a primary dealership said. "But today (Thursday), the expectation of a lower borrowing and rate cut in February has been dragging down (OIS) rates. Now it needs to be seen whether it (rates on five-year swap) can come below 6.13%, and if US yields inch lower we will soon see these levels."
 

OUTLOOK

On Friday, swap rates will take cues from the movement in 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 release of data on weekly unemployment claims in the US at 1900 IST could also give direction to US yields overnight. According to Dow Jones, jobless claims are expected to rise to 218,000 for the week ended Saturday, from 217,000 in the previous week. 

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

Edited by Saji George Titus

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