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Informist, Monday, Feb. 17, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates were little changed despite a fall in US treasury yields as overnight rates were above the repo rate even with the Reserve Bank of India's latest liquidity measures. The five-year swap rate ended off lows as a rate cut by the central bank's Monetary Policy Committee in April was priced in, dealers said.

The one-year swap rate ended at 6.30%, flat against Friday. The five-year swap rate settled at 6.08%, after hitting the day's low of 6.06%, compared to 6.09% in the previous session.

The RBI on Friday doubled the scheduled open market auction to buy gilts this week to INR 400 billion. The additional INR 200 billion at Thursday's auction is not seen bringing down the overnight Mumbai Interbank Offer Rate -- the floating leg of the OIS contract -- to near 6.25%, the policy repo rate, dealers said. The overnight MIBOR rate has been above 6.25% despite the MPC cutting the policy rate on Feb. 7. 

"It's a traders' market right now. Though people are expecting liquidity infusion from the RBI, until there is an actual fall in liquidity deficit, short-term (swaps) will not fall," a dealer at a private bank said.

The five-year swap rate was below Friday's close for most of the day as the 10-year US Treasury yield fell to 4.48% at settlement Friday against 4.54% at 1700 IST Friday. US markets are shut on Monday for Presidents' Day. US yields fell because retail sales in January fell short of expectations. Offshore traders received fixed rates tracking the fall in US yields, dealers said.
 

Domestic traders were also keen to receive fixed rates after the RBI's liquidity measure. However, the doubling of the OMO size had been widely expected last week, dealers said. Moreover, there was a lack of clarity on whether the MPC would cut the repo rate by more than 50 bps in total in 2025, they said, with the RBI projecting GDP growth in 2025-26 (Apr-Mar) at 6.7%.

"Longer-term swaps came down because US yields have flattened," a dealer at a private bank said. "There were both offshore flows as well as banks receiving rates... the April rate cut is also priced in on long-term (swaps) because one-year is still in pressure because of liquidity."

OUTLOOK

On Tuesday, swap rates may take cues from the movement in US yields in early Asian trade. US bond yields are not trading on Monday for Presidents' Day. Market participants will closely assess any statements by US President Donald Trump on tariffs and their potential impact on global trade, dealers said. 

Traders await any additional measures by the RBI to ease the liquidity deficit in the banking system. The liquidity deficit in the banking system is expected to widen further due to continued dollar sales by the RBI in the foreign exchange market as it attempts to protect the rupee. Short-term swaps will take cues from the movement in the overnight MIBOR rate, which has been set well above the repo rate of 6.25% since the rate cut last week. 

Crude oil prices could also be a trigger if they move significantly, dealers said. The one-year swap rate is seen at 6.24-6.36% and the five-year rate is seen at 6.02-6.18%.

End

Edited by Saji George Titus

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