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Informist, Tuesday, Jan. 28, 2025

By Srijita Bose and Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended higher Tuesday after traders unwound their received fixed rate bets, booking profit after a sharp fall in swap rates early in the day, dealers said. A rise in US yields also pushed up the five-year OIS rate.

The one-year swap rate ended at 6.37%, against 6.34% on Monday. The five-year swap rate settled at 6.11%, against 6.07% the previous day. Both the swaps had fallen to their lowest in over six weeks.

The five-year swap rate had fallen sharply over the past two weeks, hitting 6.03% Tuesday from a high of 6.37% on Jan. 14. Both onshore and offshore traders unwound their received fixed rate positions as they had been betting on the Reserve Bank of India introducing durable liquidity measures to bring down overnight rates, which was fulfilled by the central bank Monday.

Post market hours, the RBI Monday announced several measures to infuse durable liquidity into the banking system, including three tranches of open-market purchase of gilts through auction. The central bank also announced an 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. These three measures come after the RBI on Jan. 15 announced daily variable rate repo auctions "until further notice" to ease the widening liquidity deficit in the banking system.

"The market has been pricing in normalised liquidity for the last couple of days, and positivity had been built up yesterday (Monday) as well," a dealer at a foreign bank. "Most active guys in swaps would have taken out profit, and there were heavy flows from offshore as well. The one-year swap is not going anywhere because it is pricing in nearly 75 bps of rate easing, almost there."

Dealers continued to expect a 25-basis-point cut in repo rate by the RBI's Monetary Policy Committee at its upcoming meeting in February. Some dealers were of the view that chances of the MPC cutting rates had reduced after the RBI came out with liquidity easing measures, while others were of the view that the proactive action on liquidity by the central bank meant they were gearing up the market before cutting rates. Short-term rates did not fall as much as the five-year OIS rate even in early trade.

A rise in US Treasury yields during the day also led traders to pay fixed rates in swaps, dealers said. The yield on the 10-year benchmark US Treasury note rose to 4.57% from 4.51% at 1700 IST Monday. Traders were watchful ahead of the US Federal Open Market Committee rate decision at 0030 IST Thursday, with the two-day meet starting later Tuesday, dealers said. The CME FedWatch tool showed that Fed fund futures have almost fully priced in a status quo in rates at this meeting.

"Until (the 10-year) US yields fall below 4.50% in a sustainable way, foreign investors will remain cautious even though Trump tariffs have mostly been discounted and are expected to give soft landing support," a dealer at a private bank said. "Plus, domestic traders also are looking to hedge their gilt positions before the events." After the FOMC outcome, the Union Budget for 2025-26 (Apr-Mar) is scheduled on Saturday.

OUTLOOK

On Wednesday, swaps may take cues from the movement in crude oil prices and US yields, dealers said. The FOMC meeting outcome at 0030 IST Thursday may also lend cues.

The impact of RBI's liquidity injection measures over the next few days and weeks are also closely watched. Short-term swap rates may remain anchored as the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – is expected to be set near 6.50% for the next few days, with the banking system liquidity deficit also seen coming down, dealers said.

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 6.28-6.41% and in the five-year segment at 6.00-6.15%.

End

Edited by Ashish Shirke

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