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Informist, Tuesday, Feb. 25, 2025

By Cassandra Carvalho
 

MUMBAI – Overnight indexed swap rates ended lower due to offshore flows, tracking a fall in US Treasury yields, dealers said. Total notional volumes in the one-month swap rate surpassed those of all other tenures.

"Volumes on short-term OIS (overnight indexed swaps) have increased due to liquidity infusions by the RBI (Reserve Bank of India). We have seen demand come in T-bills and other short-term bonds also, but rates are not moving because weighted average rates have not yet come down," a dealer at a private bank said.

The one-year swap rate ended at 6.26%, against 6.27% Monday. The five-year swap ended at 6.02%, against 6.04% Monday. The yield on the 10-year benchmark US Treasury note fell to 4.35% at 1700 IST, the lowest since Dec. 13, from 4.44% at 1700 IST Monday. US Treasury yields fell as investors fled to safe-haven assets after US President Donald Trump ordered a curb on Chinese investment in some US sectors. 

The notional volumes in the one-month swap rates jumped to INR 160 billion, from INR 14.50 billion Monday, but the rate ended steady. Traders were likely locking in its rate of 6.43% to receive, nearly 18 basis points more than a 91-day Treasury bill of comparable maturity, dealers said.

Traders await India's GDP data due Friday and rate movements are likely to be sluggish until then, dealers said. Swap rates fell Monday after the minutes of the Reserve Bank of India's Monetary Policy Committee's February meeting indicated a shift in the panel's focus to growth from inflation. 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 bond traders estimate a print of around 6.4%. 

However, foreign investors betting on the probability of two more rate cuts by the US Federal Open Market Committee rushed to lock in higher rates in the swap market, causing a rise in notional volumes. Further rate cuts in the US would give room to central banks in emerging markets such as India to follow suit without risking capital outflows.

The FOMC, which left rates unchanged in January, is expected to keep them unchanged at its next meeting in March. 

"In the morning we had some offshore flows due to the fall in USTs (Treasury yields) but later it was mostly onshore traders who were receiving because there is still some expectation of rate cut (in India) and pricing in is happening mostly in the 2-5 year OIS," a trader at another private bank said. 

OUTLOOK

Financial markets are shut on Wednesday for Mahashivratri. On Thursday, swap rates may take cues from the movement in US Treasury yields. Any major geopolitical developments may also lend cues. 

Swap rates may also take cues from the INR-330-billion Treasury bill auction Thursday. The RBI rejected all bids for the 91-day and 182-day Treasury bills at the previous weekly auction, which was a boost to systemic liquidity. Any such outcome Thursday would lend cues to swap rates, dealers said.   

Short-term swaps will take cues from the movement in the overnight Mumbai Interbank Offer 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 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. A further rally in short-term bonds could translate to a fall in swap rates. 

Crude oil prices could also be a trigger if they move significantly, dealers said. The one-year swap rate is seen at 6.22-6.30% and the five-year rate is seen at 5.99-6.06%.

End

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

Edited by Saji George Titus

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