More Stories

Informist, Monday, Jan. 27, 2025

By Srijita Bose

MUMBAI - Overnight indexed swap rates ended sharply lower Monday after US Treasury yields tumbled. Traders' expectation that the Reserve Bank of India would infuse durable liquidity into the banking system after buying gilts through open market operations led trade volumes to balloon on shorter-tenure contracts, dealers said.

The one-year swap rate ended at 6.34%, the lowest since Dec. 5, against 6.36% on Friday. The five-year swap rate settled at 6.07%, the lowest since Dec. 13, against 6.13% the previous day.

A fall in US yields led traders to receive fixed rates on the two- and five-year swaps, dealers said. The yield on the benchmark 10-year US Treasury note fell to 4.51% at the end of Indian market hours Monday, from 4.63% at 1700 IST Friday. US yields were higher in early Asian trade due to growing fears of wider tariff measures following US President Donald Trump announcing the imposition of tariffs and sanctions on Colombia after it turned away two US military aircraft with migrants. The migrants were being deported as the new US administration starts to crack down on illegal immigration. The US yields fell in European market hours after the two countries reached a deal and tariffs were not imposed on Colombia.

Traders expect Trump to take a softer stance on trade and taxes than earlier feared, and US yields to ease further, dealers said. Both offshore and onshore traders received fixed rates on these expectations, dealers said.

"People are expecting a softer push on tariffs by Trump and US yields are also coming down, but the next trigger is, of course, the Federal Open Market Committee (meeting outcome)," a dealer at a private bank said. "Though everyone is expecting a pause in cuts, any commentary on Trump tariffs, inflation or on the pace of cuts by the Fed is what everyone will be looking at."

The US rate-setting panel's two-day meeting is set to begin on Tuesday. The CME FedWatch tool showed that Fed fund futures had almost fully priced in a status quo in policy rates at this meeting. Rate cuts are expected to total 50 bps in 2025, after 100 bps of policy rate easing in 2024, and may only restart by June.

On the domestic front, traders were hopeful that the Reserve Bank of India would come out with additional measures to ease tight liquidity, which would bring down overnight rates and anchor them to the repo rate of 6.50% on a consistent basis. This led to traders receiving fixed rates in contracts maturing up to one year.

RBI data after market hours Friday showed that the central bank bought INR 101.75 billion worth of gilts through screen-based open market operations in the week ended Jan. 17. This was the largest gross weekly bond purchase since it ended its government securities acquisition programme in September 2021. Banking system liquidity has remained in deficit for over a month now. The net liquidity injected by the central bank on Sunday was at INR 3.13 trillion, as per RBI data. 

Traders also expect further durable liquidity infusion measures to be announced at the RBI's Monetary Policy Committee meeting next week, along with the expectation of a 25-basis-point rate cut, dealers said. The fall in shorter tenure contracts was, however, limited as rates have already fallen to over one-month lows and as liquidity conditions in the system remained a pressure on traders, dealers said.

"The shorter tenures have already seen much of a reaction and are already fully pricing in a 25 bps rate cut (by the MPC)," a dealer at a primary dealership said. "Plus, some boost in liquidity is required now, or some change in structural view for rates to fall further."

OUTLOOK

On Tuesday, swap rates may fall after the RBI announced measures to infuse durable liquidity into the financial system after market hours, dealers said. The central bank also said it is going to continue monitoring liquidity conditions and take further measures as appropriate.

The RBI on Monday said it will buy government bonds worth INR 600 billion via open market operation auctions in three tranches. The first auction of INR 200 billion will be held on Thursday. The central bank also announced a INR-500-billion 56-day variable rate repo auction on Feb. 7, the day of its next MPC outcome. In addition, it will conduct a dollar/rupee buy/sell swap auction – the first since April 2019 – of $5 billion for a tenor of six months on Friday.

The movement in crude oil prices and US yields, as well as the FOMC meeting outcome at 0030 IST Thursday, may also lend cues. The Union Budget in February and the MPC's meeting after that are the next major domestic cues for traders. The swap rate in the one-year segment is seen at 6.28-6.38% and in the five-year segment at 6.00-6.13%.

End

Edited by Vandana Hingorani

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000 

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.