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Informist, Friday, Mar. 7, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady despite positive cues from an overnight fall in US Treasury yields. Swap rates closely tracked the movement of India's government bond yields, which traded in a narrow range, limiting volatility in swaps, dealers said. 

The one-year swap rate ended at 6.20%, flat compared to Thursday. The five-year swap ended at 5.97%, also unchanged from Thursday's close.

Swap rates opened lower tracking an overnight fall in US yields. The yield on the benchmark 10-year US Treasury note fell to 4.26% at 0800 IST from 4.33% at 1700 IST Thursday. US yields traded lower in a day of volatile trade after US President Donald Trump paused tariffs on some Mexican and Canadian imports until Apr. 2, only a few days after imposing a 25% tariff on imports from both countries. Jobless claims in the US fell last week, data released post market hours Thursday showed, but federal-worker claims rose in February.

However, the fall in swap rates tracking US yields was not sustained, especially in the five-year swap rate as traders paid fixed rates tracking bond yields. The rate closely tracks the yield of the benchmark 10-year 6.79%, 2034 bond, which rose slightly Friday due to the paper's exclusion from the Reserve Bank of India's INR 500-billion open market operation auction to buy gilts on Wednesday. Swap rates ended lower on Thursday after the RBI announced a slew of measures to add liquidity to the banking system, including two tranches of a total INR 1 trillion worth of gilt purchases through auction, along with a $10 billion dollar/rupee buy/sell swap on Mar. 24. 

"Today (Friday) we were (swap rates) were unable to fall more because G-sec yield didn't move," a dealer at a private bank said. "We're cautious because of (US non-farm payrolls) NFP, but more importantly OMO and rate cuts, etc. Towards the (fiscal) year-end we can see some good valuations in G-sec maybe that time we'll see more downward movement (in swaps)."

The central bank's announcement of liquidity measures was earlier than traders had expected, and led to a view that the RBI would be proactive in its liquidity management in March, a seasonally tight month for cash surprluses with banks. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – fell by nearly 10 basis points to 6.30%, but remains set above the RBI's repo rate of 6.25%.

Swap traders were divided on the exact impact of the liquidity measures, with some expecting a liquidity surplus in the banking system by end of March. Others, however, said that outflows for advance tax, goods and services tax and excise duties would squeeze liquidity in spite of the RBI's steps. The net liquidity injected by the central bank--a proxy for systemic liquidity conditions—was at INR 569.09 billion Thursday, against INR 544.77 billion Wednesday, data from the RBI showed. 

The RBI's liquidity measures were yet to translate to a significant fall in short-term swap rates as the MIBOR remained above the repo rate, dealers said. However, the RBI's push to infuse liquidity showed its intent to ensure efficient transmission of monetary policy, leading to increased bets of a rate cut in April. While most swap rates did not move much Friday, the one-month swap rate fell 3 basis points to the day's low of 6.47%.

The maturity of the one-month swap rate is near the rate decision by the RBI's Monetary Policy Committee on Apr. 9, pushing up its trade volumes. The key technical level of 5.92% on the five-year rate and 6.15% on the one-year rate could only be broken with a strong cue on a rate cut, as well as certainty on the overnight MIBOR being pegged to the new repo rate, dealers said. In addtion to a 25-bp rate cut, some traders are also betting on a change in the monetary policy stance to "accommodative" from the current "neutral"

"Earlier one-month was on the paying side because of the hedge against (tight) liquidity, but now its maturity has moved to MPC (meeting) time so there's receiving on rate cut views," a dealer at another private bank said. 

OUTLOOK

Swaps are not traded Saturday. On Monday, swap rates may take cues from the movement in US Treasury yields at opening after the release of US non-farm payrolls data for the February, dealers said. A survey by the Wall Street Journal expects to show a rise 170,000 jobs. US Federal Reserve Chair Jerome Powell is also scheduled to speak Friday, and comments by Fed officials John Williams, Michele Bowman and Adriana Kugler are also awaited.

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. 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 86.8725

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

Edited by Deepshikha Bhardwaj

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