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Informist, Thursday, Feb. 13, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended lower on Thursday as overseas traders received fixed rates on firming expectations of a domestic policy rate cut in April. The fall was concentrated in swap rates maturing up to two years, with the five-year swap seeing some paying pressure due to a rise in US Treasury yields, dealers said.

The one-year swap rate ended at 6.33%, against 6.36% Wednesday. The five-year swap rate settled at 6.14%, against 6.15% in the previous session.

India's CPI inflation fell to a five-month low of 4.31% from 5.22% in December, led by lower vegetable prices, data released during market hours Wednesday showed. An Informist poll of 12 economists had projected January CPI inflation at 4.5%. On Wednesday, swap rates had a muted reaction on caution ahead of US CPI data after market hours.

With the RBI also announcing a 49-day variable rate repo auction for Friday, in addition to the 56-day auction conducted last week, traders were of the view the central bank was paving the path for further monetary policy easing at its next review in April. Both the long-term variable rate repos will reverse on Apr. 4, three days before the next Monetary Policy Committee meeting starts.

"Domestic CPI is better, so there's more comfort that April is going to be a rate cut or a stance change. It leads to plenty of possibilities," a dealer at a primary dealership said. "Since most domestic traders are buying bonds, they are acting as counterparties to offshore receiving." 

While near-term swap rates had broadly priced in a 25-basis-point repo rate cut in April, uncertainty on the trajectory of interest rates beyond that kept a further fall unlikely until India's GDP data for Oct-Dec is released at the end of February, dealers said. Modest growth after a shocker in Jul-Sept will likely make the case for a deeper rate cut cycle, and renew bets of a 75-bps repo rate cut in the cycle. Currently, the one-year OIS is pricing in less than a 50% chance of a rate cut of more than 50 bps, including the quarter-percentage-point rate cut delivered by the Reserve Bank of India's MPC on Friday.

Moreover, a rise in US Treasury yields kept traders paying the five-year OIS rate, limiting its fall. The yield on the 10-year US Treasury note rose to 4.61% at 0830 IST from 4.55% at 1700 IST Wednesday after disinflation showed further signs of stalling.

The US consumer price index rose 0.5% on month in January, against a Dow Jones estimate of 0.3% rise. The reading, the highest since August 2023, pushed up US yields as expectations of the US Federal Open Market Committee cutting rates in the first half of this year waned. The FOMC left rates unchanged at its meeting last month.

"It's difficult to build a solid position on swaps at these levels," a dealer at a foreign bank said. "You have been here and back again (on the five-year OIS rate) so many times that people are afraid to receive (fixed rates) below 6.10% now."

OUTLOOK

OIS rates will take cues Friday from the movement of US Treasury yields after the US January producer price index and weekly jobless claims for the week ended Saturday, which were both released at 1900 IST. Producer prices rose 0.4% on month in January, against consensus estimates of 0.3%. US jobless claims fell by 7,000 to 213,000 in the week ended Saturday, against consensus estimates of 215,000.

Traders await any additional measures by the RBI to ease the liquidity deficit in the banking system. Market participants will closely assess any statements by US President Donald Trump on tariffs and their potential impact on global trade, especially at his meeting with Indian Prime Minister Narendra Modi. The two heads of government will address a press conference at 0330 IST Friday.

Crude oil prices could also be a trigger if they move significantly, dealers said. 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

Edited by Saji George Titus

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