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Informist, Friday, Jan. 31, 2025

By Cassandra Carvalho

MUMBAI – Most overnight indexed swaps ended steady due to caution ahead of the Union Budget for 2025-26 (Apr-Mar), dealers said. However, the two-month swap rate surged as traders paid fixed rates to hedge against rising premiums in the foreign exchange market at the end of the fiscal year, dealers said. 

The one-year swap rate ended at 6.33%, flat against Thursday's close. The five-year swap rate settled at 6.09%, against 6.08% the previous day.

The two-month swap rate jumped over 6 basis points as its tenure matched the requirements for traders looking to hedge bets against a rise in the dollar-rupee premium in the foreign exchange market expected at the end of this fiscal year in March, dealers said. 

"Today, the 2-month OIS is 7-8 basis higher than yesterday's (Thursday's close) because of arbitrage advantage driven by the year-end forward positions. Today's maturity is Apr. 3, which just crosses this year," a trader at a primary dealership said. "In year-end or March close, forward or cash-spot premiums shoot up around 10-11%." 

The rest of the market was relatively dull as traders awaited cues from the economic event of the year. The benchmark one- and five-year rates opened a tad higher due to an overnight rise in US Treasury yields after US GDP showed robust growth in the world's largest economy. The yield on the 10-year US Treasury note rose to 4.54%, from 4.51% at 1700 IST Thursday. 

The Reserve Bank of India's six-month dollar/rupee buy/sell swap auction caused volumes in the six-month and one-year swap rate to rise as traders received fixed rates after tendering dollars to the central bank. The RBI accepted $5.10 billion for a cut-off premium of 96.81 paise at the six-month swap, introduced to inject liquidity in the banking system. 

While swap rates would not be directly affected by the Budget, swap traders would watch for any cues that could affect the rate cut cycle in India, dealers said. Swap rates have already priced in a rate cut by the RBI's Monetary Policy Committee at its meeting next week. However, expectations that the rate cut cycle would be shallow kept rates from falling further. The gilt market's reaction to the Budget could also lend cues to swaps, which also kept traders cautious. 

"See at this point no one is going add or trim any positions ahead of the Budget. While there's nothing direct in it for us, we're depending on any cues on the rate cut scene—comments on growth, etc," a dealer at a private bank said.  

Trade was largely by domestic traders, as foreign investors remained on the sidelines until there was clarity on US President Donald Trump's proposed tariffs and on the rate cut cycle in India, dealers said. A large state-owned infrastructure funding company was speculated to be entering the swap market, likely in the 5-year swap. However, given the major domestic event looming large, aggressive positioning was limited, dealers said.  

Traders said that there was hardly any paying in the two- and five-year swap for bond-forward rate agreements--which are usual during the weekly gilt auction on Friday--as investors who were initially planning to pick up the 7.34%, 2064 bond at the bond auction likely picked up lesser stock than expected. Before the auction, traders speculated that a large provident fund would pick up the bond.

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may take cues from any indication from the Union Budget and its expected economic and financial market impact. The impact on gilt yields post the Budget may lead traders to change their positioning in the swap market, dealers said.

Swap rates may also take cues from the movement in the US yields after the release of US December personal consumption expenditure data, which met estimates of a 2.6% annual rise. The core component, the US Federal Reserve's preferred inflation gauge, rose to 2.8% in December, the same as in November.

The impact of RBI's liquidity injection measures over the next few days and weeks are also being closely watched. Short-term swap rates may remain near the overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--is expected to be set near 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.

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 6.23-6.41% and in the five-year segment at 6.00-6.15%.

End 

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

Edited by Akul Nishant Akhoury

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