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Informist, Friday, Feb. 28, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended off lows as US Treasury yields which inched up during the day, dealers said. India's Oct-Dec GDP came along expected lines, leading to limited movement in rates as traders had already priced in the print, they said. 

The one-year swap rate ended at 6.26%, against 6.27% Thursday, after falling to a low of 6.24%. The five-year swap ended at 6.01%, against 6.02% Thursday, recovering from the day's low of 5.98%. The lows on the five-year swap was last seen on Dec. 10.

The yield on the benchmark 10-year US Treasury note rose to 4.25% after falling to 4.22% earlier in the day, against 4.31% at 1700 IST Thursday. A slew of economic data in the US released recently indicated signs of slowing growth in the world's largest economy. This has led to traders pricing in at least two rate cuts in the US this calendar year, against initial expectations of only one cut. After market hours on Thursday, weekly initial jobless claims for the week ended Saturday rose to the highest this year, sharply higher than estimates. US fourth quarter GDP growth was unrevised, but core inflation was revised higher.

Traders now await US personal income and outlays for January at 1900 IST. The FOMC had left rates unchanged in January. The five-year swap fell in early trade due to offshore flows, tracking a fall in US yields, dealers said. 

"We saw offshore flows today (Friday), both in gilts and in swaps," a dealer at a primary dealership said. "Rate cuts (in India) is also being priced in longer tenure (swaps), so some fall was also because of that."

India's GDP growth rose to 6.2% in the December quarter from 5.6% in the September quarter according to revised data released by the National Statistical Office. The print was slightly below expectations. According to an Informist poll, GDP growth was seen rising to 6.3% in Oct-Dec from 5.6% in Jul-Sept.

Traders refrained from placing agressive bets in swaps as they said a print of 6.0-6.4% was already priced in and that a sharper reaction in government bonds is required for swaps to move as the arbitrage between the 10-year benchmark 6.79%, 2034 gilt and the five-year swap has widened to 69 basis points, dealers said. Longer-tenure swaps are already pricing in more than 50 bps of rate cuts by the Reserve Bank of India's Monetary Policy Committee during the current calender year, they said. 

"Without a sharp reaction in bonds, swaps does not have much space to move," a dealer at a private bank said. "Liquidity is a burning concern which needs to be eased first to see any reaction in the market."

The notional volume in the one-month swap rates surpassed those of all other tenures with INR 214.50 billion worth of trades, as against INR 146.50 billion Thursday, Clearing Corp of India's ASTROID platform showed. Rates on the contract rose sharply by 9 bps to 6.54% as traders likely paid rates to hedge their positions by the end of the financial year ending Mar. 31. 

Traders also said that 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, the fall in rates on shorter-tenure swaps maturing in one year was limited, dealers said. On Thursday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was at INR 1.81 trillion, against INR 1.96 trillion on Wednesday, as per RBI data.

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may take cues from the overnight movement in US Treasury yields after the release of US inflation data post market hours on Friday. Traders will wait for cues on further rate cuts by the FOMC.

Swap rates may also track the movement of bond prices during the day. Short-term swaps will take cues from overnight borrowing rates, which have been well above the repo rate of 6.25% since the repo rate cut on Feb. 7.

Market participants will closely assess any statements by US President Donald Trump on tariffs and their potential impact on global trade. Crude oil prices could also be a trigger if they move significantly, dealers said. A sharp movement of the rupee against the dollar could also give cues to swaps.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

US$1 = INR 87.4950

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

Edited by Deepshikha Bhardwaj

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