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Informist, Monday, Feb. 3, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates fell after Finance Secretary Tuhin Kanta Pandey said the Union Budget for 2025-26 (Apr-Mar) left enough room for the Reserve Bank of India to cut rates, reinforcing bets on a 25-basis-point repo rate cut on Friday, dealers said. The fall in the one-year swap rates was, however, limited as traders had already priced in a rate cut in earlier trading sessions. Traders were also cautious as the rupee fell to fresh lows against the dollar, they said.

The one-year swap rate ended at 6.32%, against 6.33% on Friday. The five-year swap rate settled at 6.07%, against 6.09% the previous day.

Trade volumes on shorter-tenure contracts maturing in up to one year were higher than usual ahead of the policy decision, with varied bets on the timing and pace of repo rate cuts in India. However, a February rate cut had largely been priced in, and the one-year swap rates reflected a repo rate cut of at least 50 basis points in the next 12 months, dealers said. Some traders also bet on a total repo rate cut of 75 bps in the current cycle, with the terminal policy rate at 5.75%.

With the RBI infusing liquidity into the banking system, including through open market gilt purchases, expectations of overnight rates being anchored near the repo rate also went up. The RBI has bought over INR 500 billion in gilts since Jan. 15, including INR 200.20 billion at an auction on Thursday. Data released on Friday showed the central bank bought INR 208.50 billion outside open market operation auctions in the week ended Jan. 24, which was seen by traders as another preparatory measure for a rate cut. 

"It looks like trading flow today (Monday) and not hedging positions. Everyone is pricing a rate cut now, and offshore flows are also coming into OIS," a dealer at a primary dealership said. "Though the Budget (gross borrowing for FY26) amount was more than what the market was expecting, gilts has absorbed the news and focussing on rate cuts now, so OIS is also following suit."

The Budget presented by Finance Minister Nirmala Sitharaman on Saturday pegged the government's gross borrowing in FY26 at INR 14.82 trillion, higher than INR 14.01 trillion in FY25 and INR 14.55 trillion in an Informist poll. Despite this, the 10-year gilt yield ended 3 basis points lower at 6.67% on Monday. 

Offshore traders received fixed rates on the five-year swap as well, betting on a rate cut by the MPC, The fall in the contract was, however, limited after US President Donald Trump announced tariffs on Canada, Mexico and China, they said. A trade war emanating in the US would drive up demand for safe-haven assets, including dollar-denominated debt and rates, which may spur outflows from emerging markets such as India.

Traders were also cautious about placing aggressive bets on a rate cut as the rupee fell to fresh lows during the day, dealers said.  The rupee slumped below the psychologically crucial 87-per-dollar mark, ending at a record closing low against the dollar on Monday due to a surge in the dollar index.

"As long as the rupee is not stable, foreign flows will not come in," a dealer at a private bank said. "So, even if there are now cases for a rate cut, if the rupee keeps falling at the same pace, RBi will have to decide whether they want to go for a cut at this stage or wait, or even lower the quantum of cuts in the year."

OUTLOOK

On Tuesday, swap rates may fall as traders build up their bets on the view of a rate cut by the MPC on Friday. OIS rates may also be sensitive to the rupee's movement against the dollar, dealers said.

The impact of RBI's liquidity injection measures over the next few days is also being closely watched. The overnight Mumbai Interbank Offered 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.

The movement in crude oil prices, US yields and any declarations by US President Trump may also be triggers. The swap rate in the one-year segment is seen at 6.23-6.40% and in the five-year segment at 6.00-6.15%.

End

Edited by Avishek Dutta

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