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Informist, Friday, Jan. 24, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended sharply lower as traders received fixed rates after US President Donald Trump called for lowering rates by the Federal Open Market Committee and lower interest rates globally, dealers said. This led to traders betting on a 25-basis-point cut in the repo rate by the Reserve Bank of India's Monetary Policy Committee in February, they said.

The one-year swap rate ended at 6.36%, hitting its lowest since Dec. 10, against 6.41% on Thursday. The five-year swap rate settled at 6.13%, the lowest in over a month, against 6.18% the previous day. Both the contracts ended at or near the day's low.

The one-year contract was the most traded on Friday and hit its highest traded volume on record this week, as traders built up their bets on India's rate-cutting cycle beginning in as little as two weeks. Moreover, before the MPC next meets on Feb. 5, traders expect the RBI to inject durable liquidity into the banking system, likely through open market purchases of gilts, a long-term dollar-rupee buy/sell swap, or a cash reserve ratio cut to be announced at the MPC meet. Both offshore and onshore traders received fixed rates on these expectations, dealers said.  

"The OIS market had underpriced rate cuts in India as well even though gilts reacted so much, so now they are just picking up the pace," a dealer at a primary dealership said. "The market is now fully pricing in a February rate cut (in India) and there are other domestic triggers such as the Budget and something on liquidity that people are hoping for now...the rupee is also in reversal mode and the medium term view looks good domestically."

The appreciation of the rupee against the dollar after Trump's speech also pulled rates down during the day as traders expect the MPC to be well positioned to cut rates and infuse durable liquidity if the rupee is seen stabilising, dealers said. Traders have also been expecting the government's net borrowing at Union Budget for 2025-26 (Apr-Mar) to be lower than what it had budgeted for this fiscal year, as it aims for fiscal consolidation. 

In a virtual speech at the World Economic Forum in Davos, Trump said he would demand an immediate cut in US interest rates, which led traders to receive fixed rates with the hope that US Treasury yields would fall soon. The yield on the 10-year US Treasury note, however, remained largely unchanged during the day from 4.62% at 1700 IST Thursday. 

Dealers said that Trump's call for lowering rates somewhat eased earlier fears of the 10-year US Treasury yield jumping sharply in 2025. Analysts at Nomura and T. Rowe Price have raised the possibility of the 10-year US Treasury note touching 6% this year, with widespread concern over at least 5% being hit. 

"Even though Trump does not have the power to dictate rate cuts by the Fed, the chatter on Fed hiking rates in the year seems to fade out as the Trump administration is pushing for lower rates," a dealer at a private bank said. "But US yields have not moved today (Friday), so people are still going to wait before going aggressive on Fed rate cuts." 

The five-year swap contract also fell sharply due to offshore flows and because traders unwound their fixed rate bets as risk premiums eased, dealers said. Traders also hope US yields could fall as Trump is seen to take a softer stance on trade and tariffs than he had indicated during his election campaign, even though the prospect of such action still hangs over the market, dealers said.

OUTLOOK

Swaps are not traded on Saturday. On Monday, 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.

Any geopolitical triggers during the weekend or the movement in crude oil prices may also lend direction to swaps. Traders will watch the movement of the Indian rupee against the dollar. The swap rate in the one-year segment is seen at 6.33-6.44% and in the five-year segment at 6.08-6.20.

End

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

Edited by Akul Nishant Akhoury

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