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Informist, Wednesday, Mar. 12, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates fell after CPI inflation in February fell to the lowest level in seven months, dealers said. The inflation data boosted expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee at its upcoming policy review in April.

The one-year swap rate ended at 6.12%, the lowest close since Aug. 17, 2022, compared to 6.18% on Tuesday. The five-year swap ended at 5.96%, down from 5.99% at Tuesday's close. 

Traders had widely expected the MPC to lower rates by another 25 basis points in April, and the one-year swap rate was now fully pricing it in. Though some traders even hope for a larger rate cut in April, the swap rate does not reflect it yet, dealers said. Instead, expectations for the next rate cut after April have moved up a month ago from October to a high probability of another 25 bps rate cut in June. The one-year swap rate had been pricing in a 50 bps rate cut in the next 12 months for a few weeks now, but traders are now betting on favourable liquidity conditions in FY26, pulling down the overnight rates below the policy repo rate.

Some traders are also building their bets on the RBI changing its stance to 'accommodative' from 'neutral' at its upcoming review, they said. Further bets on the stance change were cooled by core inflation rising to a 15-month high of 4.0%, though it is not expected to be a cause for concern in the coming months or to derail interest rate cuts.

"The lower CPI led to huge receiving... there was receiving in the morning as well, people were expecting a lower CPI but the print was a pleasant surprise for all, " a dealer at a private bank said. "Onshore receiving is there, offshore interest is also significant." 

India's CPI inflation for February fell to 3.61%, falling below the RBI's medium-term target of 4.0% for the first time since August. An Informist poll had estimated the February CPI inflation at 3.9%. Traders had expected a reading between 3.7% and 4.2%, which led to receiving in swaps maturing in up to two years in anticipation of the data at 1600 IST. The two-year swap rate ended at 5.93%, its lowest since May 2, 2022, when the policy repo rate was 4%.

Speaking to television channel ET Now after the release of CPI inflation data, MPC Member Saugata Bhattacharya said the trajectory of inflation was likely creating the space for further lowering of interest rates. The Indian economy can absorb further stimulus without "overheating", the external member in the RBI's rate-setting panel said.

Meanwhile, the yield on the benchmark 10-year US Treasury note rose to 4.30% from 4.23% at 1700 IST Tuesday as data released showed that US job openings were better than expected and hiring edged up while layoffs fell.  

The rise in US yields did not deter offshore traders in receiving fixed rates, though there was some caution before the US CPI print at 1800 IST, dealers said. "We have already decoupled a lot from US yields, and foreign investors are receiving because domestic cues make a strong case for rate cut," a dealer at another private bank said. The impact of the US yield movement was seen in the five-year swap rate, which fell less than swaps of other tenures as it more closely tracks offshore cues.

Rates on shorter-tenure contracts maturing up to one year fell on a slight fall in overnight funding rates, dealers said. On Wednesday, the overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--fell to 6.34%, after rising to 6.37% on Tuesday. The net liquidity injected by the central bank--a proxy for systemic liquidity conditions--reduced to INR 1.05 trillion on Tuesday from INR 1.45 trillion on Monday, the latest RBI data showed. The measures by the RBI to inject liquidity into the banking system to counteract significant outflows in the remainder of March are expected to keep liquidity conditions comfortable and near-term swap rates at multi-year lows.

The notional trade volume on the one-month contract was at INR 113.60 billion on Wednesday. Traders likely received fixed rates to hedge against their exposure in foreign currency, dealers said. The one-year forward dollar premium rose to 2.17-2.20% from 2.15-2.17% on Tuesday. "One-month (rise in volume and fall in rates) is because of forward guys, the ones who trade based on FX forwards... because of hedging... and from swap points you can calculate if you have any arbitrage then you can sell your positions," a dealer at a primary dealership said.

OUTLOOK

Swap rates may take cues from the movement in US Treasury yields at open on Thursday, after the release of US CPI data. US weekly jobless claims may also influence US yields and, subsequently, swap rates, dealers said.

US CPI inflation was lower than expected at 2.8% on year compared with 2.9% estimated in a Dow Jones poll. Core CPI rose 0.2% on month, against 0.3% expected. The data may lend cues on the US Federal Open Market Committee's decision on rates. The FOMC is scheduled to meet next week and is widely seen as keeping policy rates unchanged.

Market participants will assess any statements by US President Donald Trump on tariffs and their potential impact on global trade. Short-term swaps will closely track the movement in overnight MIBOR.

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 6.10-6.20% and the five-year rate is seen at 5.90-6.03%.

End

US$1 = INR 87.21

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

Edited by Saji George Titus

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