More Stories

Informist, Wednesday, Jan. 29, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady on caution before the US Federal Open Market Committee meeting outcome early Thursday, dealers said. The one-year swap rate ended at 6.36%, against 6.37% on Tuesday. The five-year swap rate settled at 6.10%, against 6.11% the previous day.

Though the FOMC is widely expected to announce a status quo on rates, traders shied away from placing aggressive bets before the event. The yield on the 10-year benchmark US Treasury note eased to 4.53% at 1700 IST from 4.57% at the close of Indian market hours Tuesday. US yields fell as traders hoped for comments from US Federal Reserve Chair Jerome Powell that would support a rate cut by the FOMC in March. While this led to traders receiving fixed rates in early trade, the event risk pushed up the five-year OIS rate by the end of trade, dealers said.

The two-day FOMC meeting is currently underway, with the outcome scheduled at 0030 IST Thursday. Traders are more keenly waiting for Powell's comments on rate cuts and the impact of US President Donald Trump's economic policies on the US rate trajectory, dealers said.

"It needs to be seen how the commentary on future cuts comes (after the FOMC meet)," a dealer at a private bank said. "If there is any indication of a rate hike during the year that (the five-year swap) rates can go back up near 6.15% levels. Also people will look at the comments on impact of Trump tariffs by (US) officials."

Traders were also cautious ahead of India's 2025-26 (Apr-Mar) Budget to be presented on Saturday, dealers said. A fall in market borrowing beyond what the market expects may lead to a fall in overnight indexed swap rates as traders unwind their fixed rate bets taken as a hedge against their gilt holdings. Net market borrowing is seen at INR 11.20 trillion, according to an Informist poll of 18 analysts and fund managers.

The Reserve Bank of India's measures to infuse durable liquidity have also cemented hope of a rate cut by the Monetary Policy Committee next week, dealers said. The central bank's daily variable rate repo auctions being held "until further notice" since Jan. 16, coupled with Monday's announcement of a 56-day variable rate repo auction, OMO auctions and a dollar/rupee buy/sell swap auction have led market participants to believe that the RBI is setting the stage for the MPC to cut the repo rate on Feb. 7. Two of the panel's three external members had voted for a repo rate cut in December, while all three RBI members had voted for a status quo on the rate at 6.50%. The one-year OIS is currently pricing in a 25-basis-point rate cut in February, with more than 50 bps cut during the year, dealers said.

"When the events pass, traders want to be ready to take fresh positions, so right now they are getting out of their old positions," a dealer at a primary dealership said. "These levels are good to book profits also, and some amount of caution before the events is keeping market in this narrow range. If there is big surprise at the Budget or a cut (in repo rate) at the MPC, (five-year swap) rates will fall below 6.00%."

Rates on swap rates maturing up to three months fell after not reacting immediately to the RBI's liqudity measures announced Monday. Even as the overnight Mumbai Interbank Offer rate was largely unchanged from Wednesday, easing in banking system liqudity conditions gave confidence to traders that overnight rates will anchored at the repo rate of 6.50%. Latest data showed the RBI's net liquidity injected by the RBI--a proxy for systemic liquidity deficit--fell to INR 2.51 trillion, against INR 3.10 trillion on Monday. 

OUTLOOK

On Thursday, swaps may take cues from the movement in US yields after the FOMC meeting outcome at 0030 IST, dealers said. The movement in crude oil prices and declarations by US President Trump may also be triggers.

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 on Feb. 1 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 Deepshikha Bhardwaj

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.