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Informist, Tuesday, Mar. 11, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady Tuesday due to a lack of change in rate expectations, with rates already near multi-month lows pricing in a repo rate cut in April, dealers said. There was, however, a downward bias in rates tracking an overnight fall in US Treasury yields.

The one-year swap rate ended at 6.18%, compared to 6.19% on Monday. The five-year swap ended at 5.99%, unchanged from Monday's close.

Volumes in short-term swap rates were muted after nearly a month of heightened activity. "Recently, we had a lot of changes in liquidity, so we saw a lot of activity in short-term rates. But now that that's done, there's no movement there either, so it's just gone back to what volumes used to be earlier," a trader at a primary dealership said.

A slew of measures announced by the Reserve Bank of India to inject liquidity into the banking system, along with hedges against expectations of a year-end spike in overnight rates, had caused a flurry of activity in rates maturing in under one year. On Tuesday, the overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--rose to 6.37%, after remaining steady near 6.30% since Wednesday. The net liquidity injected by the central bank--a proxy for systemic liquidity conditions--was at INR 1.45 trillion on Monday, largely unchanged from INR 1.46 trillion on Saturday, the latest RBI data showed.

Even as rate cut expectations grew in the US, OIS rates have already been pricing in another 50 basis points of rate cuts by the Reserve Bank of India's Monetary Policy Committee this year, including a 25 bps rate cut when the panel next meets Apr. 7-9. Further rate cuts in India are not likely as inflation is seen at 4.2% in FY26, against the RBI's 4% target, while GDP growth is seen at 6.7%, dealers said.

India's CPI data for February, the last inflation reading before the rate-setting panel meets next, is due at 1600 IST Wednesday. A poll of 16 economists by Informist estimated the reading at a six-month low of 3.9%, primarily due to a further decline in food prices. Traders are not building aggressive positions before the data since a reading of 3.7-4.2% is priced in, dealers said.

"There's nothing happening in swaps today (Monday), volumes are too low," a dealer at a private bank said. "There's no positioning before CPI (for February) also, it will most likely be a non-event. Unless it's (a reading of) 3.5% or 4.5%, there won't be any reaction." 

Swap rates opened a tad lower, tracking an overnight fall in US yields. The yield on the 10-year US Treasury note fell to 4.19% at 0900 IST from 4.25% at 1700 IST Monday. The yield fell 6 basis points as investors fled to safe-haven assets on fears that the imposition of tariffs by US President Donald Trump and government job cuts would lead to a recession in the world's largest economy. Fed fund futures are now pricing in at least three cuts in the federal funds rate by the US Federal Open Market Committee in 2025, against expectations of two cuts earlier this year.

OUTLOOK

On Wednesday, swap rates may take cues from the movement in government bonds and US Treasury yields at open. There may be caution ahead of the release of the CPI data for February at 1600 IST Wednesday, dealers said. 

Unless the domestic inflation data springs a surprise, traders may remain on the sidelines for US CPI data for February, due post-market hours 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 MIBOR--the floating leg of the OIS contract. The RBI will infuse INR 500 billion through an open market operation auction to buy gilts Wednesday.

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

US$1 = INR 87.2125

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

Edited by Saji George Titus

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