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Informist, Thursday, Feb. 27, 2025

By Srijita Bose 

MUMBAI – Overnight indexed swap rates ended off lows on Thursday tracking US Treasury yields which inched up during the day, dealers said. Caution ahead of India's Oct-Dec GDP print on Friday also led traders to unwind some of their received bets, they said.

The one-year swap rate ended at 6.27%, against 6.26% Tuesday, after falling to a low of 6.25%. The five-year swap ended at 6.02%, flat against Tuesday, rising from the day's low of 5.99%. Indian financial markets were shut Wednesday on the occasion of Mahashivratri.

The yield on the benchmark 10-year US Treasury note rose to 4.31% after falling to 4.28% earlier in the day, against 4.35% at 1700 IST Tuesday. With recent US economic data pointing at an increased need for the US Federal Open Market Committee to support growth, US yields have been falling this week, dealers said.

The yield on the 10-year benchmark US note has fallen by 20 basis points since Feb. 20 as economic data, especially services data, indicated signs of slowing growth spurring expectations of at least two rate cuts this calendar year, against an initial forecast of only one. Traders now await US inflation data post market hours on Friday for cues on further rate cuts by the FOMC. The FOMC had left rates unchanged in January. The five-year swap was lower in early trade due to offshore flows, tracking a fall in US yields, dealers said.

Onshore traders, who have been hoping that India's Oct-Dec GDP growth would cement the case for a rate cut in April, also received fixed rates both on the one-year and the five-year swaps, dealers said. An Informist poll estimates the Oct-Dec at 6.3%. However, caution before the print also led some traders to pay fixed rates.

"Rates are stabilising before the GDP data, after falling the entire week," a dealer at a private bank said. "Everything will now depend on the data, and while a print of around 6.2-6.3% is already priced in, anything lower than 6.0% will lead to a rally in bonds and fall in swaps."

The notional volume in the one-month swap rates surpassed those of all other tenures with INR 146.50 billion worth of trades, as against INR 160 billion Tuesday, Clearing Corp of India's ASTROID platform showed. Rates on the contract rose slightly as traders unwound their previous received bets on caution before the GDP data, dealers said.

With the weighted average call money rate remaining mostly above the repo rate of 6.25%, and the overnight Mumbai Interbank Offer Rate –- the floating leg of the OIS contract -- set above the repo rate due to tight liquidity conditions, rates on shorter-tenure swaps maturing in one year have remained high, dealers said. On Tuesday, net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was INR 1.96 trillion against INR 1.93 trillion on Monday, as per the RBI data.

"Short-term (swaps) have seen no movement after the repo cut as liquidity is still tight," a dealer at another private bank said. "Only if there is additional liquidity will we see some traction in these papers, otherwise all rate cuts being priced in two-year and five-year swaps."

OUTLOOK

On Friday, swap rates may take cues from the overnight movement in US Treasury yields. Rates may remain steady before the release of India's Oct-Dec GDP print as traders await cues on rate cuts by the RBI's Monetary Policy Committee, dealers said.

Swap rates may also take cues from the INR 320-billion gilt auction Friday. This is the last scheduled gilt auction during the financial year ending Mar. 31. 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. 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.

Offshore traders may also remain on the sidelines ahead of the release of US inflation data post market hours on Friday. They will wait for cues on further rate cuts by the FOMC.

Any major geopolitical developments may also lend cues. Crude oil prices could also be a trigger if they move significantly, dealers said. The one-year swap rate is seen at 6.18-6.30% and the five-year rate is seen at 5.95-6.06%.

End

Edited by Ashish Shirke

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