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Informist, Thursday, Jan. 30, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower on Thursday. The five-year swap tracked a fall in US Treasury yields during the day, dealers said. Rates on short-tenure contracts also fell as traders received fixed rates on the persisting expectation of a 25-basis-point rate cut by the Reserve Bank of India's Monetary Policy Committee at its February meeting next week. 

The one-year swap rate ended at 6.33%, against 6.36% on Wednesday. The five-year swap rate settled at 6.08%, against 6.10% the previous day.

The yield on the 10-year benchmark US Treasury note was 4.51%, against 4.53% at the close of Indian market hours Wednesday. The Federal Open Market Committee early Thursday unanimously voted to leave the federal funds target range unchanged at 4.25-4.50%, in line with market expectations. The yield briefly hit 4.60% overnight, but cooled off after US Federal Reserve Chair Jerome Powell said he expected US inflation to fall further. However, the CME FedWatch tool showed that Fed fund futures reflected an 18% probability of a 25-bps rate cut at the FOMC's next meeting in March, down from 31% before the outcome.

"Some offshore flows came in today (Thursday), but rates are still mostly range-bound," a dealer at a private bank said. "Though chances of a rate hike (by the FOMC) during the year have gone down, a rate cut doesn't seem likely anytime soon."

Offshore traders likely received fixed bets after the uncertainty before the FOMC outcome passed, dealers said. Traders were, however, watchful of any policy pronouncements by US President Donald Trump which could impact US yields or inflation, they said.  

Rates on contracts maturing within a year fell with higher trade volumes as traders found it lucrative to receive fixed rates on expectations of rate cuts by the Monetary Policy Committee in both February and April, dealers said. The market is currently pricing in nearly 75 bps of repo rate cuts, to 5.75%, within the year, they said.

Traders refrained from placing aggressive bets despite the Reserve Bank of India's recent steps to ease liquidity and higher chances of a repo rate cut, ahead of the Union Budget for 2025-26 (Apr-Mar) to be announced on Saturday, dealers said. While most traders still expected the government's gross borrowing for FY26 to be lower than that budgeted for the current fiscal year, some dealers said that after measures taken on liquidity by the RBI, chances of the government switching FY26 bonds with the central bank had reduced. 

"After the RBI came out with OMO buy auction announcement (on Monday), chances of lower borrowing in the FY26 Budget went down as people were also betting on a gilt switch between RBI and the government resulting in a lower net borrowing figure in FY26, which looks unlikely now since RBI has already addressed that concern on the liquidity front," a dealer at a private bank said. "Plus there is also fair amount of caution before these events and people don't want to take fresh bets before they play out." 

OUTLOOK

On Friday, swap rates may open little changed ahead of the Union Budget for FY26 on Saturday. While the announcements in the Budget may not directly impact OIS rates, the impact on gilt yields may lead traders to change their positioning in the swap market, dealers said. 

The impact of RBI's liquidity injection measures over the next few days and weeks is also being 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 nearer 6.50%, with the banking system liquidity deficit also seen coming down, dealers said. The liquidity measures are seen as a precursor to a rate cut by the MPC next week.

Swaps may also take cues from the movement of US yields. The movement in crude oil prices and any declarations by US President Trump may also be triggers. 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 Tanima Banerjee

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