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Informist, Thursday, Feb. 6, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady due to caution ahead of Friday's outcome of the Reserve Bank of India's three-day Monetary Policy Committee meeting, dealers said. Dealers said that the benchmark swap rates had already priced in the expected 25-basis-point repo rate cut by the panel. The five-year OIS rate ended off lows despite a fall in US Treasury yields. 

The one-year swap rate ended at 6.32%, against 6.31% Wednesday. The five-year swap rate settled at 6.07%, compared with 6.06% the previous day. The contract had hit a low of 6.03%.

"People have already positioned themselves for the MPC based on their views, and now are just waiting for the confirmation on Friday (outcome)," a dealer at a primary dealership said. "There are so many combinations at play here, so some amount of hedging is happening, but even for people who are extremely bullish in their views, no one wants to go aggressive at this point though many will be going in with naked positions."

There were some bets of a 50-bps rate cut from the current 6.50%, while others expected a change in stance to 'accommodative' from the current 'neutral', dealers said. On other hand, traders unwound some received positions as a depreciating rupee reduced expectations of a rate cut by the MPC on Friday. The fall of the rupee to a record low of 87.58 a dollar also pushed up one-year swap rates slightly.

The notional traded volume on the one-month contract jumped to a record INR 227.05 billion on Clearing Corp. of India's OIS platform as the market got closer to an expected rate cut, dealers said. Should the MPC cut rates on Friday, the Mumbai Interbank Offer Rate – the floating leg of the OIS contract – is also expected to fall in equal measure. Moreover, the RBI may announce fresh measures to infuse liquidity into the banking system, helping the overnight MIBOR to be set near the new repo rate. The overnight MIBOR has not been set at or below the repo rate of 6.50% since Jan. 15. 

"It looks like they are trading on the one-day tactical juice (on the one-month OIS), this usually happens a day before the policy (outcome)," a dealer at a private bank said. "After the rate cut, they (traders) will end up getting almost 20 bps extra out of their received positions and get out of the trade."  

Rates on the five-year swap fell early in trade after the yield on the 10-year US Treasury note fell overnight to 4.42% from 4.48% at the close of Indian market hours Wednesday. The levels hit by the benchmark US yield this week are the lowest since Dec. 18. US yields fell after the US Treasury kept its planned borrowing of longer-term debt unchanged during the year as well as on comments by an official that US President Donald Trump's administration will focus on lowering 10-year US yield. 

Offshore flows came into the five-year OIS as US yields eased early, but likely dried up as the US yields recovered some of the fall by the end of Indian market hours. Some traders also took profits, unwinding their received fixed rate positions, as the five-year OIS rate fell to its lowest in a week, they said.

OUTLOOK

On Friday, swap rates are seen opening steady before RBI Governor Sanjay Malhotra presents the MPC outcome at 1000 IST. Swaps will take cues from the governor's statement to trade during the day, dealers said.

In the event of a rate cut by the MPC, rates across tenures could fall another 15 bps, dealers said. Short-term swaps may fall further if the RBI announces measures to immediately boost liquidity conditions, they said. 

OIS rates may also be sensitive to the rupee's movement against the dollar. 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 6.15-6.50% and in the five-year segment at 5.90-6.23%.

End

US$1 = INR 87.58

Edited by Akul Nishant Akhoury

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