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Informist, Tuesday, Feb. 4, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady due to lack of significant fresh cues. Traders held on to their bets of the Reserve Bank of India's Monetary Policy Committee cutting the policy repo rate by 25 basis points on Friday, though some traders paid fixed rates due to a rise in US Treasury yields, dealers said. 

The one-year swap rate ended at 6.31%, against 6.32% on Monday. The five-year swap rate settled at 6.07%, flat compared to the previous day.

The Monetary Policy Committee's three-day meeting will begin on Wednesday. The six-member rate-setting panel is expected to cut the repo rate by at least 25 basis points, with some dealers expecting as much as a 50-bps cut from the current 6.50%. The RBI's proactive stance on easing the liquidity deficit in the banking system the past month is seen as a preparatory step for a rate cut, dealers said. 

Traders received swaps maturing in less than one year, the most rate-sensitive tenure, as the potential rate cut came closer, dealers said. An infrastructure lending non-banking finance company is also likely to have received fixed rates to hedge the interest rate risk it undertook by raising bonds on Tuesday, dealers said. 

"Some foreign flows came into OIS today (Tuesday) in one-year swap on Friday rate cut view, even though we saw paying in five-year due to US yields rising," a dealer at a primary dealership said. Notional volumes in the swap jumped to INR 120.15 billion due to offshore flows, from INR 67.75 billion on Monday. 

The yield on the benchmark US Treasury note rose to 4.58% from 4.55% at close of the Indian market on Monday. The rise in US yields led traders to pay fixed rates on the five-year contract, dealers said. Paying interest was limited as fears of a trade war were allayed after US President Donald Trump paused his order on imposing tariffs on Mexico and Canada, which he had announced during the weekend, they said.

The slight easing of the dollar index from a three-week high after the pause on tariffs also saw the rupee appreciating during the day, dealers said. The rupee ended at 87.07 on Tuesday after a record closing low of 87.1850 against the greenback on Monday. Depreciation of the rupee could push up near-term swap rates, as a falling local currency may slow down the pace of rate cuts in India, they said.   

"The rupee is still a pressure for the market, but people have already priced in two rate cuts in the year (2025) almost fully," a dealer at a private bank said. "For further movement, an actual cut (in rates) with some added boost on liquidity or clarity on rupee and Trump tariff impacts are required."

OUTLOOK

On Wednesday, swap rates may open steady as a rate cut of 25 basis points at the MPC meeting on Friday is already priced in across contracts, dealers said. Short-term swaps may fall further as the three-day policy review meeting begins Wednesday.

OIS rates may also be sensitive to the rupee's movement against the dollar, the movement in US Treasury yields and crude oil prices. US President Trump's announcements overnight may also lend cues, dealers said.

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

US$1 = INR 87.0675

Edited by Avishek Dutta

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