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Informist, Tuesday, Feb. 11, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended mixed, with swaps maturing in under one-year rising and longer-term swap rates falling. By the end of trading hours, however, long-term swap rates were steady tracking an intraday rise in US Treasury yields, dealers said. The one-year swap rate ended at 6.36%, flat from Monday. The five-year swap rate settled at 6.14%, marginally down from 6.15% in the previous session.

After market hours Monday, the Reserve Bank of India doubled the amount of gilts it will buy Thursday at its open market auction purchase to INR 400 billion. This boost to durable liquidity in the banking system was expected to push down swap rates Tuesday, dealers said. However, only rates of tenures one-year and above fell, as the RBI's continued intervention in the foreign exchange market raised fears of tightening liquidity, and caused short-term rates to rise. 

"If there is positivity in the market (due to expectations of more liquidity measures and rate cuts), but the immediate scenario is negative then of course, the short-term (swap rates) will rise while the longer-term will fall," a dealer at a private bank said. 

The rupee soared against the dollar Tuesday, reversing all losses of the past week. The rupee ended 65 paise higher at 86.8275 against the dollar Tuesday, the most in a day since Nov. 11, 2022. The RBI is estimated to have sold around $15 billion since Monday in the spot market, according to foreign exchange dealers. They said the central bank also extended its intervention to the offshore non-deliverable forwards market with estimated sales of around $10 billion over and above the sales in the onshore spot market.

The RBI's surprising intervention to defend the rupee raised concerns that liquidity will fall further, continuing its deficit since mid-December. Monday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--rose to INR 1.96 trillion from INR 1.33 trillion Sunday. While some traders expected the frequency and size of open markt auctions to increase, the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – remained above the RBI's repo rate at 6.40%, which pushed up short-term rates. Traders also expect the RBI to announce other liquidity-easing measures, such as a dollar/rupee buy/sell swap or more long-term variable rate repo auctions.

On the rate cut front, swap traders remained uncertain about further cuts this year, after the RBI's Monetary Policy Committee Friday cut the repo rate by 25 basis points. After pricing in that cut, swap rates were steady at current levels until new cues point to a rate cut in April, dealers said. 

"Earlier swaps were pricing in around 75 to 100 bps of cuts (this year) but now they're pricing in 50-75 (bps)," a dealer at another private bank said. 

Long-term rates recovered from their fall, and ended largely steady as traders paid fixed contracts tracking an intraday rise in US yields. The yield on the benchmark 10-year US Treasury note rose to 4.52% at 1700 IST from 4.50% at 1700 IST Monday. US yields rose ahead of the US CPI inflation data for January, due post market hours Wednesday. The consumer price index is expected to rise 2.9% on year, according to estimates compiled by The Wall Street Journal. The data print will lend cues on further interest rate cuts by the US Federal Open Market Committee this year. The FOMC left rates unchanged at its meeting last month. 

OUTLOOK

On Wednesday, swap rates will take cues from the overnight movement of US Treasury yields after US Federal Reserve Board Chair Jerome Powell presents Monetary Policy Report to US Senate Banking Committee at 2030 IST.

Swap rates will also take cues from India's CPI data for January due at 1600 IST Wednesday. The data is expected to print at a five-month low of 4.5%, driven by a sharp fall in vegetable prices, according to an Informist poll of 12 economists. Swap traders have priced in a reading of 4.4-4.5%, and swaps may react only if the print is beyond this range. Swap rates will also be sensitive to the rupee's movement against the dollar as well as to any change in crude oil prices.

The one-year swap rate is seen at 6.31-6.41% and the five-year rate is seen at 6.09-6.19%.

End

US$1 = INR 86.8275

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

Edited by Saji George Titus

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