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Informist, Friday, Feb. 7, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates maturing in six months or more ended higher after the Reserve Bank of India's Monetary Policy Committee cut the repo rate by 25 basis points but left the outlook on further rate cuts uncertain after keeping its stance unchanged at 'neutral', dealers said. Swaps maturing in three months and below fell after the rate cut, with relative certainty on at least another rate cut in April.

The one-year swap rate ended at 6.35%, against 6.32% Thursday. The five-year swap rate settled at 6.12%, compared with 6.07% the previous day. Both the certainty of a 75-bps policy easing cycle, and the view that it would follow soon after April, were eroded due to the RBI's lack of guidance on rates after the MPC outcome, dealers said.

The six-member panel cut the repo rate for the first time since May 2020 to 6.25%, after keeping the rate unchanged at 6.50% since February 2023. This was the first interest-rate decision for RBI Governor Sanjay Malhotra, who took charge in December, and for Deputy Governor M. Rajeshwar Rao, who was allocated the monetary policy department on Jan. 15. The rate cut vote and the status quo on stance were both unanimous votes, after the previous two decisions of keeping rates unchanged had dissenting votes on rate cuts, dealers said. 

Short-term rates of up to three months were down as traders received fixed contracts on hopes of another 25-basis-point cut by the MPC in April, dealers said. Swap rates are pricing in up to two more rate cuts in this calendar year, but traders are unsure of when the second would be after April.

At the MPC outcome, Malhotra did not announce any new measures to ease the liquidity deficit, while swaps and bond traders were expecting a calendar of open market operation auctions to purchase gilts to add durable liquidity to the system. Since mid-December, the RBI has had to net inject liquidity into the banking system on a daily basis.

The notional volume in the 2-month contract jumped to INR 126.20 billion on the Clearing Corp. of India's OIS trading platform, its highest in two years. The contract was pricing in tight liquidity conditions around the time of its maturity on Apr. 11, while traders also positioned for a potential rate cut, leading to a heavy two-way trade, dealers said. A new raft of liquidity measures is considered essential at a time when the RBI's dollar sales continue to pinch liquidity and currency in circulation outflows with advance tax payments will only widen the liquidity deficit prevailing since mid-December.

"The two-month (swap rate) is currently at the marginal standing facility rate, that means that we're not expecting any liquidity in two months from now, which is something I've never seen before," a dealer at a private bank said. On Thursday, net liquidity injected by the RBI--a proxy for systemic liquidity deficit--was INR 697.55 billion against INR 450.06 billion on Wednesday.

On Thursday, the total notional volumes of the 1-month contract jumped to a record INR 227.05 billion as the market got closer to an expected rate cut, dealers said. However, despite the uncertainty on further rates which kept market sentiment negative after the MPC outcome, traders did not unwind or offset the contract as the loss incurred by holding the contract would likely be negligible, dealers said. 

"In such short-term positions, people will hold on to their views because a 3-4 basis point rise is nothing, it is a very marginal loss," a dealer at another private bank said. Ultimately, the one-month contract ended 4 bps lower.

Offshore activity in swap contracts during the day was limited, dealers said, due to caution ahead of the US employment report for January due at 1900 IST. Despite high volumes, most of the trade was transacted between domestic investors, dealers said. 

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may take cues from the US non-farm payrolls data, published in the US employment report for January due post market hours, for cues on further rate cuts by the US Federal Open Market Committee. 

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. The swap rate in the one-year segment is seen at 6.30-6.40% and in the five-year segment at 6.07-6.17%.

End

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

Edited by Ahul Nishant Akhoury

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