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Informist, Thursday, Feb. 20, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady due to a lack of significant fresh cues on interest rates. Traders are waiting for an influx of liquidity by the Reserve Bank of India to ease the systemic liquidity deficit, dealers said. 

The one-year swap rate ended at 6.30%, against 6.29% on Tuesday. The five-year swap rate settled at 6.08%, against 6.07% on Tuesday. Swaps were not traded on Wednesday as money markets were closed on Wednesday for Chhatrapati Shivaji Maharaj Jayanti.

The yield on the 10-year US Treasury note was at 4.53% at 1700 IST against 4.52% on Tuesday, largely unchanged after the minutes of Federal Open Market Committee's January meeting released early Thursday suggested that Federal Reserve officials may be ready to hold rates steady until inflation in the US eases. Traders also remained cautious over US President Donald Trump's tariff plans, after he announced on Tuesday that he would impose 25% tariffs on imports of pharmaceuticals, automobiles, and semiconductor chips to the US, dealers said. 

Traders received fixed rates on the five-year swap in early trade as they had already priced in a pause in rates in the US and are awaiting more clarity on Trump's policies to take cues, dealers said. However, by the end of the day, swap rates inched up as bond prices fell in the last hour of trade. At the RBI's open market auction to buy INR 400 billion worth of gilt, on the 10-year benchmark 6.79%, 2034 bond the central bank set lower cut-off and accepted only about 12% of the total quantum, which led to gilt prices falling, dealers said. 

"There is less space in five-year to receive right now. Whatever rate cut pricing has happened is anyway on the longer tenures, such as two-year and five-year," a dealer at a private bank said. "OMO auction was also disappointing and most paying was by onshore people I think." 

Meanwhile, rates on shorter tenure contracts were also paid by some sections of the market as uncertainty on liquidity conditions persisted, though traders were pricing in another repo rate cut in April with possibility of a third 25-basis-point cut before December, dealers said. The RBI's Monetary Policy Committee cut the repo rate to 6.25% from 6.50% on Feb. 7, the first rate cut in nearly five years. 

On Tuesday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--narrowed slightly to INR 1.67 trillion from INR 1.81 trillion on Monday. However, the overnight Mumbai Interbank Offer Rate –- the floating leg of the OIS contract -- was set above the repo rate of 6.25%, continuing a streak that started on Nov. 13.

Traders expect the MIBOR to remain higher than the repo rate until the end of March, chosing to pay fixed rates in similar tenures on OIS, dealers said. Traders are expecting the central bank to announce additional liquidity measure to tackle tight liquidity, but said that a further downward movement in rates would only come after the cash crunch abated either through durable liquidity measures or long-term variable rate repo operations.

"Borrowing rates are high so even though a rate cut has happened, shorter-tenures are not reflecting that," a dealer at another private bank said. "Whatever pricing in of rate cuts is happening, its only on liquid longer-tenure ones."

OUTLOOK

On Friday, swap rates may take cues from the movement in US Treasury yields after the release initial jobless claims in the US for the week ended Saturday, dealers said. Any major geopolitical developments may also lend cues.

Swaps may also take cues from movement of gilts after the INR 390 billion gilt auction results, dealers said. 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

Edited by Deepshikha Bhardwaj

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