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Informist, Friday, Feb. 21, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates in short maturity segments of up to one year fell by around 2 basis points on Friday as the Reserve Bank of India took steps to ease the ongoing strain on liquidity in the banking system. Rates in longer tenures ended unchanged from the previous close as traders awaited fresh cues on interest rates before placing any major bets, dealers said.

The one-year swap rate ended at 6.30%, flat against Thursday. The five-year swap also ended flat at 6.08%.

Rates on short-term swaps maturing within a year fell after the RBI rejected all bids for 91-day and 182-day Treasury bills auctioned on Thursday. This was the first time in nine years that the central bank rejected bids at the 182-day T-bill auction and nearly two years since it last rejected all bids at the 91-day auction. With the government not rolling over its T-bills maturing this week, the net redemption of T-bills resulted in an inflow of around INR 215 billion into the banking system. 

Additionally, shorter-tenure rates also eased after the RBI conducted three variable rate repo operations on Friday, supplying banks with nearly INR 1.94 trillion. Traders also expected the RBI to announce another tranche of OMO auction after the market hours.

"The fall in shorter-tenure was because of the VRRs and T-bill," a dealer at another private bank said. "Overall volumes across tenures have been very low as most of the triggers are now priced in, people are waiting for GDP print next and before that volatility in swaps will be more than gilts but still look for these liquidity triggers and US yield movements." 

With pressure on liquidity amid the ongoing goods and services tax outflows, the fall in shorter-tenure rates was limited, dealers said. The overnight Mumbai Interbank Offer Rate –- the floating leg of the OIS contract -- eased slightly to 6.40% but remained above the repo rate of 6.25%, continuing a streak that started on Nov. 13. On Thursday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was INR 1.88 trillion, against INR 1.77 trillion on Wednesday.

Rates on the five-year swap eased slightly in early trade as US yields cooled overnight after data released on Thursday showed initial jobless claims in the US were higher than expected in the week ended Saturday. The benchmark 10-year US Treasury yield fell to 4.50% from 4.53% at 1700 IST on Thursday. 

However, onshore traders paid fixed rates on the one-year and the five-year swap rates after cut-off prices on all bonds at the INR 340-billion gilt auction were below traders' expectations, dealers said. Traders also likely paid fixed rates in longer-tenure contracts to hedge against forward rate agreements written for life insurers on long-term bonds, they said. 

"Fall in US yields led to some receiving in the morning," a dealer at a private bank said. "But gilts fell due to bad auction cut-offs, leading OIS also to pay."

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may take cues from the movement in US Treasury yields. Any major geopolitical developments may also lend cues.

The minutes of the Monetary Policy Committee meeting on Feb. 5-7 showed that members were concerned about a sharp slowdown in growth when it decided to cut the repo rate for the first time in nearly five years. On Monday, traders will assess any guidance from the MPC minutes on further rate cuts in the next policy review.

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 Ashish Shirke

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