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Informist, Monday, Feb. 24, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates in tenures maturing in one-year and above ended down after the minutes of the Reserve Bank of India's Monetary Policy Committee's February meeting indicated a shift in the committee's focus to growth from inflation, dealers said. Additionally, a fall in US Treasury yields over the weekend and the RBI's announcement post market hours Friday of a dollar/rupee buy/sell swap worth $10 billion aided the fall in swap rates. 

The one-year swap rate ended at 6.27%, against 6.30% Friday. The five-year swap ended at 6.04%, against 6.08% Friday.

The minutes of the MPC meeting released post market hours Friday indicated that concerns about a growth slowdown in the Indian economy overpowered views on inflation. The rate-setting panel was increasingly comfortable on the price stability front, with Governor Sanjay Malhotra saying the food inflation outlook was "turning decisively positive". The meeting was the first for Malhotra and for Deputy Governor M. Rajeshwar Rao. The three external members-- Nagesh Kumar, Ram Singh and Saugata Bhattacharya--focused on the effect of restrictive policy on growth, with Kumar suggesting the committee opt for a 50 basis point cut.

"The minutes essentially say 'For growth, we're willing to do anything' and most of them are positive that near-term inflation will be under control so its this and the fact that we're getting continuous liquidity (after the FX swap announcement)," a dealer at a private bank said.

Swap rates were pricing in more than two further rate cuts this calendar year, including one likely cut in April, along with another possible reduction in June, dealers said. This view was most pronounced in the one-year swap rate, which fell 5 basis points to the day's low of 6.25% from Friday's close. The 1-year rate has been amongst the least volatile tenures ever since the MPC cut the repo rate by 25 basis points on Feb. 7.

Short-term swap rates fell late in the day on expectation that RBI's liquidity easing steps would alleviate the ongoing cash crunch in the banking system. The overnight Mumbai Interbank Offer Rate – the benchmark floating rate for OIS contracts – was set at 6.38%, below 6.40% for the first time since the MPC's rate cut this month. The currency swap scheduled for Feb. 28, is largely seen as a roll-over of previous currency swaps. However, the assurance of continued liquidity support was a positive for short-term swap rates, dealers said. 

The fall in swap rates was accelerated by offshore flows tracking a fall in US Treasury yields over the weekend. The yield on the 10-year US Treasury note fell to 4.43% at 0900 IST from 4.50% at 1700 IST Friday, after US services data in February reported by S&P Global showed business activity fell to a 17-month low. However, traders paid fixed rates tracking an intraday rise in US Treasury yields nearing the close of market hours, dealers said. 

Yields on short-term gilts maturing upto five years fell during the day as their yields are more sensitive to near-term interest rate expectations. Tracking the movement in the bond market, swap rates within the one-year and five-year segment were down with higher volumes. 

The RBI's rejection of all bids at the 91-day and 182-day Treasury bill auction Thursday also fueled speculation of further T-bill auctions being cancelled or bids being rejected in the Jan-Mar quarter, a move seen boosting the systemic liquidity. As traders calibrated their interest rate expectations, the OIS market was teaming with activity, as opposed to a lacklustre gilt market.

"The show has moved to OIS, we're seeing more action there since now everyone is waiting for GDP data and everyone is already positioned in bonds," a dealer at another private bank said. India's GDP for Oct-Dec and the second advance estimate for 2024-25 (Apr-Mar) will be released at 1600 IST Friday. An Informist poll estimates the Oct-Dec reading at 6.3%, while swap traders estimate a print of around 6.4%.

OUTLOOK

On Tuesday, swap rates may take cues from the movement in US Treasury yields. Any major 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. Traders await the India GDP data on the domestic front, and a slew of comments and speeches by US Federal Reserve officials and US inflation data on the global front this week. Swap rates may also track the movement of bond prices during the day. 

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

US$1 = INR 86.6950

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

Edited by Deepshikha Bhardwaj

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