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Informist, Monday, Feb. 10, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended higher in varying degrees on Monday. The five-year OIS rate rose more tracking a rise in US Treasury yields, dealers said. Traders were still disappointed by the outcome of the Reserve Bank of India's Monetary Policy Committee meeting, due to lack of change in stance or additional liquidity infusion, which led to the one-year inching up.

The one-year swap rate ended at 6.36%, against 6.35% Friday. The five-year swap rate settled at 6.15%, compared with 6.12% the previous session.

The yield on the 10-year benchmark US Treasury note rose to 4.50% at 1700 IST from 4.44% on Friday after US President Donald Trump's comments on introducing new tariffs on steel and aluminium imports into the US. He also said he would declare reciprocal tariffs on Tuesday or Wednesday, which would be implemented almost right away, affecting all nations and aligning with the tariff rates imposed by each nation.

Moreover, the monthly non-farm payrolls data also showed a broadly robust labour market. Government data showed US non-farm payrolls rose by 143,000 in January, missing estimates in a Reuters poll. Even so, the US unemployment rate dipped to 4.0% in January, the lowest since May.

With fears of Trump rushing to impose tariffs, concern about US rate cut trajectory by the US Federal Open Market Committee resurfaced. The FOMC kept rates unchanged at its meeting on Jan. 30. Offshore traders likely paid fixed rates as US yields rose, dealers said.

"The Trump uncertainty is certainly playing out and the rise in US yields led to the 5-year OIS rising today," a dealer at a private bank said. "People who received when rates fell would be unwinding at these levels (in both one-year and five-year contracts)."

The RBI's rate-setting panel had cut the repo rate by 25 basis points to 6.25% on Friday. However, with swap rates rising and the Mumbai Interbank Offer Rate – the floating leg of the OIS contract – not aligning to the new repo rate due to tight liquidity conditions, traders unwound their prior bets. Most short-term swap rates are pricing in only a single 25-basis-point further rate cut in 2025, though it may come as soon as April, dealers said.

Meanwhile, the one-year swap rate rose in early trade as the rupee touched a record low of 87.95 to a dollar, dealers said. As the rupee retraced most of the fall by the close of trade, traders' interest in paying fixed rates in OIS was also limited, dealers said. However, traders remained unsure about the future trajectory of repo rate cuts in India during the year. A fall in the rupee makes imports more expensive, increasing fears of imported inflation and no deep rate-cutting cycle. The RBI's GDP growth projection for 2025-26 (Apr-Mar), at 6.7%, also does not suggest more monetary policy support would be offered.

"Most people are expecting a cut in April (by the MPC) and is almost fully pricing in the cut right now, but there is still a lot of uncertainty after the MPC did not change the stance," a dealer at a primary dealership said. The MPC unanimously retained its policy stance at 'neutral' against some traders' bets of an 'accommodative' stance.

"But I think liquidity infusion will be there after the last tranche of the OMO auction, so that is offsetting some of the fears, especially for short-end," the dealer said.

OUTLOOK

On Tuesday, shorter-tenure swap rates may fall after the RBI doubled the size of Thursday's open market operation purchase auction to INR 400 billion, which will add more liquidity than expected to the banking system, dealers said. A fall in gilt yields could also impact swaps on Tuesday.

Swaps may also take cues from US yields and crude oil prices at opening. 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 6.08-6.20%.

End

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

Edited by Ashish Shirke

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