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Informist, Thursday, Mar. 6, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended off lows on Thursday due to a rise in US Treasury yields. Rates fell in early trade after the Reserve Bank of India Wednesday announced additional measures to ease the liquidity deficit in the banking system, including two tranches of open market purchase of gilts through auction for an aggregate amount of INR 1 trillion, dealers said.

The one-year swap rate ended at 6.20%, against 6.21% Wednesday. The five-year swap ended at 5.96%, against 5.95% Wednesday.

Late Wednesday, the RBI said it would buy gilts worth INR 1.00 trillion through open market auctions in March. In addition, it would conduct another dollar/rupee buy/sell swap auction of $10 billion for a tenor of 36 months on Mar. 24.

"Onshore traders received, though volumes did not pick up much," a dealer at a private bank said. "MIBOR has already come down, so its comfortable to receive right now, because from April, rates should fall more after the rate cut."

The overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--fell to an over two-year low, causing extreme shorter-tenure swaps maturing up to three months to fall, dealers said. Rates on other tenures also fell in early trade due to the RBI's liquidity boost, they said. Nomura expects the two-year swap rate to ease to 5.60% over the coming months, it said in a note. Offshore traders also likely received fixed rates in early trade as they looked for arbitrage on the one-year swap as the one-year dollar/rupee forward rate eased to 2.04-2.07% from 2.22-2.24% on Wednesday, dealers said. 

Borrowing rates in the triparty repo market were well below the repo rate on Thursday as the liquidity position was quite comfortable for banks, leading traders to receive fixed rates on shorter-tenure OIS contracts, dealers said. The net liquidity injected by the RBI on Wednesday rose to INR 544.77 billion primarily due to payment for the INR 505.00-billion bond auction of state governments on Tuesday. Core liquidity may return to a surplus by mid or late May, a note by Bandhan Asset Management Co. said.

Meanwhile, some dealers still think these measures may only be enough to manage the strain on liquidity until the middle of the month, after which the central bank will need to do more as corporate advance tax payment will add renewed pressure. Nevertheless, the size of open market purchase announced by the RBI was much more than traders' expectations of around INR 600 billion of purchases.

However, dealers said that with this measure, the RBI has opened up the floodgates to proactively infuse durable liquidity, with an aim to ensure that rate cut transmission takes place. This in turn increased bets for another rate cut at the RBI's next Monetary Policy Committee meeting in April. 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. With rates cuts already priced in, the fall in swaps was relatively modest compared to gilt yields which fell to a month's low, dealers said. 

The rise in the benchmark 10-year US Treasury note to 4.33% from 4.25% at 1700 IST Wednesday, led offshore traders to pay fixed rates. US yields rose following a sell-off in global bond markets amid geopolitical uncertainty. German bund yields rose as the country plans to increase fiscal spending on defence. Asian bond yields were also up, with Japan's 10-year yield hitting a high not seen since 2009, as per media reports.

"Offshore traders were booking profits, there is still a continued downward trend, but the fall on longer-tenure will take some time because rate cuts are already priced in unlike gilts which still has space," a dealer at a primary dealership said.

OUTLOOK

On Friday, swap rates may take cues from the overnight movement in US Treasury yields at opening after the release of US unemployment claims for the week ended Saturday, dealers said. Traders may show some caution before the release of US non-farm payrolls data on Friday, they said.

Swap rates may also track the movement of government bond yields during the day. 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.

Market participants will assess any statements by US President Donald Trump on tariffs and their potential impact on global trade. A possible global trade war following Trump's imposition of tariffs could fuel 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 6.16-6.26% and the five-year rate is seen at 5.90-6.04%.

End

US$1 = INR 87.11

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

Edited by Ashish Shirke

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