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Informist, Monday, Mar. 10, 2025

By Cassandra Carvalho
 

MUMBAI – Short-term overnight indexed swap rates ended steady, while the five-year swap rate ended higher as traders booked profits after receiving fixed rates when the five-year rate was trading in the 6.15-6.20% range. The writing of a bond forward-rate agreement for long-term gilts also aided the rise in the swap rate, dealers said.

The one-year swap rate ended at 6.19%, compared to 6.20% on Friday. The five-year swap ended at 5.99%, from 5.96% at Friday's close. Both contracts remained near multi-month lows as traders expected the Reserve Bank of India's Monetary Policy Committee to cut the repo rate again in April.

Swap rates opened steady despite a rise in US Treasury yields over the weekend. The yield on the benchmark US Treasury note was slightly higher, at 4.29% at 0900 IST compared to 4.26% at the close of the Indian market on Friday. With no reaction to the overnight move, the intraday easing to below Friday's levels was also set aside, dealers said.

Traders unwound their received fixed rate bets after making around 20 basis points in gains on those bets in a month. Corporate entities also unwound their received positions at a profit, dealers said. The rise in the five-year swap rate was also attributed to a large insurance company paying fixed rates for a forward rate agreement in gilts of 30-40 year tenures, dealers said. 

"There's a paying bias in swaps because of a FRA (forward-rate agreement) in the insurance segment," a dealer at a private bank said. The insurer's counterparty on a bond-forward agreement, typically a bank, pays fixed rates to hedge its interest rate risk. Long-term gilt yields fell last week after nearly a month of underperformance because of demand for forward rate agreements by a state-owned insurance company, gilt dealers said.

Some gains were offset due to receiving by foreign portfolio investors. The five-year non-deliverable swap rate was 1 basis point lower than that of the five-year rate onshore, dealers said. The one-year swap rate is largely pricing in another two rate cuts of 25 bps each by the RBI's MPC, and until another rate cut, which is expected in April, the rate is expected to trade in a narrow range. Until a strong cue such as a rate cut, swap rates have been closely tracking the static movement of gilt yields the past month. The static movement of bond yields capped any siginificant movement in rates, dealers said.  

"Traders have already made the most of the arbitrage between gilts (yields) and OIS (swap rates) so until there's a sustained rally in gilts, OIS is going to remain in a range," a dealer at another private bank said. 

OUTLOOK

On Tuesday, swap rates may take cues from the movement of government bond yields, along with US Treasury yields at open. Swap rates may also take cues from the result of the INR 495.22 billion state bond auction, as demand for forward rate agreements may rise on purchase of long-term state bonds. 

Traders may also position ahead of February CPI data for India and the US due on Wednesday. Market participants will assess any statements by US President Donald Trump on tariffs and their potential impact on global trade. Short-term swaps may fall more during the day due to the RBI's liquidity measures and tracking the movement in overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract.

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 6.15-6.23% and the five-year rate is seen at 5.95-6.03%.

End

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

Edited by Deepshikha Bhardwaj

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