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Informist, Wednesday, Feb. 5, 2025

By Cassandra Carvalho

MUMBAI – The five-year overnight indexed swap rate ended slightly lower, tracking an overnight fall in US Treasury yields after data showed an easing labour market, dealers said. The one-year swap rate ended steady after the rupee fell sharply to a record low against the dollar, leading to caution before the outcome of the Reserve Bank of India's Monetary Policy Committee meeting Friday.

The one-year swap rate ended at 6.31%, flat against Tuesday. The five-year swap rate settled at 6.06%, compared to 6.07% the previous day. The three-day MPC meeting began Wednesday. 

The yield on the 10-year US note fell to 4.48% at the end of Indian market hours on Wednesday from 4.58% Tuesday. US yields eased overnight as the Job Openings and Labor Turnover Survey for December, released by post Indian market hours Tuesday showed that job openings declined more than the consensus estimates, indicating a slight slowdown in the US labour market. The pause in US President Donald Trump's imposition of tariffs on Mexico and Canada also aided the fall in US yields, dealers said.

The delay in imposition of tariffs eased concern about how much further the US Federal Open Market Committee could cut rates this year. The FOMC kept rates unchanged at its meeting last week. US yields continued to ease intraday, with offshore traders also likely receiving swap rates, increasing notional volumes traded, dealers said.

"There were offshore flows in OIS as US yields fell, but some people also unwound their received positions at these levels as the rupee has also been falling," a dealer at a primary dealership said.

The fall of the rupee against the dollar to a record low of 87.4900 pushed up swap rates slightly intraday, despite the easing in US yields. Traders unwound some received contracts as a depreciating rupee reduced some expectations of a rate cut by the MPC this week. 

Most traders expect a rate cut of 25 basis points to be announced on Friday, with some bets on a quantum as high as 50 bps from the current 6.50%. However, benchmark swap rates had already priced in the cut, and were unlikely to move further downward until the outcome, which kept downward movement in rates limited, dealers said. The one-month swap rate eased 3 bps to 6.44% as the potential rate cut came a day closer.

The notional volumes in the two-month swap jumped to INR 104.25 billion, compared to INR 99.60 billion Tuesday. Coupled with offshore flows, this was also likely due to the easing liquidity deficit in the banking system, dealers said. On Tuesday, the net liquidity injected by RBI fell to the lowest level since Jan. 5. Net liquidity injected — a proxy for systemic liquidity deficit – was at INR 382.16 billion on Tuesday against INR 1.08 trillion on Monday.

"The one-year has come down, of course, because of UST (US Treasury yields), but because the (liquidity) deficit has also fallen," a dealer at a private bank said. "The one-year has otherwise been quite stagnant in its movement." The one-year swap rate hit a low of 6.29%, before ending flat.

OUTLOOK

On Thursday, swap rates may take cues from the overnight movement of US Treasury yields after the release of the US ADP National Employment Report for January due at 1845 IST. Short-term swaps may fall further if the liquidity conditions improve, dealers said. 

OIS rates may also be sensitive to the rupee's movement against the dollar and crude oil prices. US President Donald Trump's announcements overnight may also lend cues, dealers said. Traders also await the US employment report for January, due post-market hours Friday, for non-farm payrolls data for cues on further rate cuts by the US Federal Open Market Committee.

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 87.4650

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

Edited by Saji George Titus

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