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Informist, Wednesday, Mar. 5, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower as liquidity conditions eased, aiding traders' rate-cut bets for the Reserve Bank of India's Monetary Policy Committee meeting in April, dealers said. An intraday fall in US Treasury yields also led to a fall in swap rates. 

The one-year swap rate ended at 6.21%, the lowest since August 2022, against 6.24% Tuesday. The five-year swap ended at 5.95%, the lowest in over five months, against 6.00% Tuesday.

Swap rates across tenures fell as liquidity conditions eased to the best levels seen since mid-December, dealers said. The net liquidity injected by the central bank--a proxy for the systemic liquidity deficit--stood at INR 204.17 billion Tuesday, the lowest since Dec. 15. Liquidity conditions have eased due to the government's month-end spending and the settlement of the RBI's $10 billion dollar/rupee buy/sell swap, which itself added nearly INR 870 billion in rupee liquidity.

Traders said lower funding costs--the weighted average triparty repo rate was below 6.00% for the second straight day--enabled them to increase their bets on the rate-setting panel cutting the repo rate by 25 basis points to 6.00% in April, dealers said. Swaps are currently pricing slightly more than 50 basis points of rate cuts over the next 12 months, with one in April and the next likely in August or October, dealers said. 

The overnight Mumbai Interbank Offer Rate–-the floating leg of the OIS contract--also fell to its lowest in over two years, causing shorter-tenure swaps maturing in one year to fall, dealers said. Corporate houses are also likely to have received fixed rates as funding costs fell. The overnight MIBOR was set at 6.29% Wednesday, the lowest since Feb. 7, 2023. 

"Liquidity was obviously a trigger, we have not seen such movement in gilts in some time and they were just coming on par with swaps now," a dealer at a primary dealership said. "MIBOR has also finally come down, so we are seeing a move in short-term (swaps) as well."

However, the fall in the one-month swap was limited as traders were still unsure of improvement in liquidity conditions for the rest of the month, with a drain of nearly INR 1.5 trillion expected on advance tax outflows, which could again widen the deficit. The notional volume in the one-month swap rates surpassed that of all other tenures with INR 124 billion worth of trades, against INR 100 billion Tuesday, the Clearing Corp. of India's 'ASTROID' platform showed. The volume of trades in the contract have shot up over the last few days due to its early April maturity, which allows traders to hedge their interest rate risk at the year-end, when overnight funding rates spike, dealers said.

Meanwhile, the yield on the 10-year benchmark US Treasury note rose to 4.27% at 0910 IST from 4.17% at 1700 IST Tuesday. US yields reversed the previous day's fall as risk appetite improved, following US Commerce Secretary Howard Lutnick's statement that the Donald Trump administration could roll back the tariffs on Canada and Mexico imposed Tuesday.

However, offshore traders are likely to have received fixed rates as the non-deliverable overnight indexed swap rates were consistently lower than onshore rates in the two- and five-year segments. Traders looking for arbitrage heavily received fixed rates in the second half of the day, particularly as the 10-year US yield also cooled to 4.23% intraday, dealers said.

The rise in the rupee during the day as the dollar index fell to a four-month low also pushed swap rates lower, dealers said. The rupee ended 0.4% higher at 86.95 against the dollar Wednesday.

"There is an arbitrage of around 1 basis point as offshore guys are positioning for further rate cuts, which is why offshore (activity) has been on the receiving side," a dealer at a private bank said. "I don't think there is room to fall further; 50 bps of further rate cuts are already priced in, and it is too early to have certainty of a cumulative 100-bps rate cut."
 

OUTLOOK

Thursday, swap rates may take cues from the overnight movement in US Treasury yields at opening after the release of S&P US Services Purchasing Managers' Index for February, dealers said. Swap rates may also track the movement of government bond yields during the day after the RBI announced open market operation auctions to buy gilts amounting to INR 1 trillion in two tranches this month. 

The central bank also announced $10 billion dollar/rupee buy/sell swap auction as part of its liquidity managing measures ahead of large tax outflows and other banking system liquidity drains in March. With the RBI's proactive announcement of liquidity infusion, traders may also raise their bets on another repo rate cut in April. 

Short-term swaps may fall more during the day due to the RBI's liquidity measures and tracking the movement in overnight MIBOR--the floating leg of the OIS contract. The overnight MIBOR Wednesday was set at 6.29%, the lowest since February 2023.

Market participants will assess any statements by President Trump on tariffs and their potential impact on global trade. A possible global trade war following Trump's imposition of tariffs could fuel a rise in inflation and cause central banks across the globe to refrain from cutting rates. On the other hand, the impact of these policies on growth could also conceivably increase the pressure on these banks to cut rates further. The actions of the US Federal Reserve may become crucial as Canada, Mexico, and China are the top trading partners of the US, which means tariffs on these three countries will immediately impact prices in the world's largest economy.

Crude oil prices could also be a trigger for swaps 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 86.95

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

Edited by Rajeev Pai

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