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Informist, Tuesday, Feb. 18, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady due to a lack of significant fresh cues on interest rates. Some domestic traders received swap rates while selling government bonds at a profit as their prices rose, dealers said.

The one-year swap rate ended at 6.29%, against 6.30% on Monday. The five-year swap rate settled at 6.07%, against 6.08% on Friday.

Swap rates maturing up to one year were pricing in a repo rate cut in April and the possibility of another rate cut later in 2025. However, traders were uncertain whether liquidity conditions would support a fall in the overnight Mumbai Interbank Offer Rate –- the floating leg of the OIS contract -- to near the repo rate of 6.25%. The overnight MIBOR has been set at or above the repo rate since Nov. 13.

"The one-year has hit the low it has hit pre-policy, when market was pricing in both a rate cut and massive liquidity support or a change in stance. It doesn't have much room to move lower," a dealer at a private bank said.

On Feb. 5 and 6, the one-year swap rate had hit a low of 6.29%, then the lowest since September 2022. While the Reserve Bank of India's Monetary Policy Committee cut the repo rate by 25 basis points to 6.25% on Feb. 7, the policy stance remained unchanged at 'neutral' and the central bank did not announce any fresh liquidity infusion measures.

Some traders received fixed rates after offloading bonds at a profit near the end of trade, offsetting the position, dealers said. Bond prices rose in the last two hours of trade, after remaining steady earlier, due to buys from mutual funds ahead of an INR 400 billion open market operation to buy bonds by the RBI. 

Offshore traders' activity was muted for a second straight day, ahead of key interest rate triggers such as the minutes of the US Federal Open Market Committee's January meeting at 0030 IST on Thursday, dealers said. The non-deliverable overnight indexed swap rates, which are settled offshore, remained below onshore rates due to constant receiving from foreign investors, they said.

Though trade volumes were muted, swap rates had inched up due to the rise in US rates earlier, but traders looked out for further movement on domestic monetary policy, dealers said. The yield on the 10-year benchmark US Treasury note rose to 4.52% at 1700 IST from 4.48% at 1700 IST on Friday, since US markets were shut on Monday for Presidents' Day.

"Nothing much is happening right now, even offshore traders are quiet today," a dealer at a foreign bank said. "But yes, there is no paying pressure either from that side because non-deliverable OIS in both two- and five-year are lower than onshore due to flows. Those don't require logic, they just bring down the rate."

OUTLOOK

Money markets are shut on Wednesday for Chhatrapati Shivaji Maharaj Jayanti. On Thursday, swap rates may take cues from the movement in US Treasury yields after the release of the US FOMC minutes early Thursday, dealers said. Geopolitical developments may also lend cues.

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 repo rate cut on Feb. 7. 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 6.02-6.15%.

End

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

Edited by Deepshikha Bhardwaj

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