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Informist, Wednesday, Feb. 12, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady on Wednesday despite a lower-than-expected headline inflation print as the data did not lend strong enough cues for the market to alter its base case expectation of another 50 basis points of rate cuts ahead, dealers said. Traders were also waiting for the US CPI print, due at 1900 IST, to take further cues to trade. 

India's headline CPI inflation fell to a five-month low of 4.30% in January from 5.22% in December, led by lower vegetable prices, data released by the statistics ministry showed. An Informist poll of 12 economists had predicted the headline CPI inflation to have likely fallen to a five-month low of 4.5% in January. 

The one-year swap rate ended at 6.36%, flat from Tuesday. The five-year swap rate settled at 6.15%, against 6.14% in the previous session.

In light of easing inflation and slowing growth, the Reserve Bank of India's Monetary Policy Committee cut the policy repo rate by 25 basis points to 6.25% last week, the first rate cut in nearly five years. However, traders said that the print was already priced in and the tight liquidity conditions in the banking system remained a concern for them even when the central bank has come up with a series of actions to boost the liquidity, dealers said.

"The India CPI was mostly priced in, but what is surprising is that rates have not moved anywhere after the rate cut (by the MPC on Friday)," a dealer at a private bank said. "Even after the CPI, no change in rate cut expectations during the year, and of course liquidity still remains a concern."

With the RBI's intervention through dollar sales in the foreign exchange market, the liquidity deficit in the banking system is expected to widen further. 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. On Tuesday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--was INR 1.91 trillion, marginally lower than INR 1.96 trillion on Monday.

The RBI on Monday doubled the size of its open market operation auction for the purchase of government securities on Thursday to INR 400 billion. Caution ahead of the auction also kept rates steady during the day, dealers said. Traders expect the frequency and size of the OMO purchase auctions, along with other liquidity-easing measures, such as a dollar/rupee buy/sell swap or more long-term variable rate repo auctions to increase.

Rates on shorter tenure contracts maturing up to one-year remained high in line with the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – which at 6.40%, was well above the RBI's repo rate of 6.25% due to tight liquidity conditions. Though traders expect another cut in repo rates as early as April, rates on shorter tenure contracts are only seen falling once the liquidity conditions improve, dealers said. 

Traders were also waiting for the US CPI data post market hours to gauge the trajectory of rate cuts by the Federal Open Market Committee during the year, dealers said. Offshore traders paid fixed rates on the five-year swaps due to rise in US Treasury yields before the data, dealers said. The yield on the 10-year US Treasury note rose to 4.55% from 4.53% at 1700 IST on Tuesday after comments by US Federal Reserve Chair Jerome Powell, who said the central bank is in no rush to cut interest rates further.

"There was some offshore paying due to US yields, which moved up the five-year rate in early trade," a dealer at another private bank said. "But it came down because of caution before the data prints (both India and US CPI) as well as for (OMO) auction tomorrow."

OUTLOOK

On Thursday, swap rates will take cues from the overnight movement of US Treasury yields after the US CPI data for January is released, dealers said. The US consumer price index rose 0.5% on month, against a Dow Jones estimate of 0.3%. The higher-than-view reading may reduce expectations of the US FOMC cutting rates in the first half of this year. The FOMC left rates unchanged at its meeting last month. 

Rates on shorter-tenure contracts could fall after the RBI, post market hours, announced a 49-day variable rate repo auction of INR 750 billion on Friday, dealers said. Traders will also take cues from the result of the OMO purchase auction during the day. 

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 86.89

Edited by Ashish Shirke

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