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Informist, Monday, Mar. 17, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended slightly lower as US Treasury yields fell and traders continued to bet on a 25-basis-point repo rate cut by the Reserve Bank of India's Monetary Policy Committee in April, dealers said. Trade volumes were muted due to a lack of fresh cues on interest rates.

The one-year swap rate ended at 6.11%, compared with 6.13% on Thursday. The five-year swap ended at 5.95%, against 5.97% at close on Thursday. India's money markets were shut on Friday for Holi.

The yield on the benchmark 10-year US Treasury note fell to 4.30% from 4.34% at 1700 IST on Thursday. Traders tracked the movement of US yields ahead of the US Federal Open Market Committee's meeting this week. The FOMC, which is scheduled to meet on Tuesday and Wednesday, is expected to hold rates steady at 4.25-4.50%, according to the CME FedWatch tool. However, Fed fund futures are pricing in three rate cuts by the panel in 2025. Traders will watch closely for commentary from the committee, particularly at US Federal Reserve Chair Jerome Powell's press conference after the rate decision. 

Offshore traders likely received fixed rates on the two- and the five-year swaps tracking fall in US yields, but in thin volumes, dealers said. The two-year swap rate ended at 5.90%, its lowest since May 2, 2022. Swap rates maturing up to two years have fallen dramatically since January-end as traders firm up bets on a deeper domestic rate cut cycle than earlier expected, with the one-year swap rate pricing in another 50 bps of rate cuts in 2025, dealers said.

"Some offshore flows may have come in today (Monday)... but volumes are really poor to show any view-based flow," a dealer at a private bank said. "US yields are down so that also gave some cues, but before FOMC they (foreign traders) will not want to go aggressive right now."

With the sharp fall in swap rates, but no corresponding movement in gilt yields despite the MPC's repo rate cut in February, traders entered bond-swap transactions, seeking to capture the arbitrage. The spread of the five-year benchmark gilt's yield over the five-year swap rate has widened to 65 basis points from 53 bps on Jan. 31. Traders picked up the government bond while paying the corresponding swap rate. Dealers said that unless gilt yields fall from current levels, a sharp fall in swaps is unlikely to happen. 

"Domestic guys will want to lock in the arbitrage between gilts and swaps," a dealer at a primary dealership said. "But this is a good level to pay to hedge against gilt positions too."

Meanwhile, trade volumes on shorter-tenure swaps maturing within a year were muted as traders were about the widening liquidity deficit despite measures by the RBI to inject additional liquidity. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – was set at 6.41% Monday, against the 6.25% repo rate. According to data from the RBI, the net liquidity injected by the central bank--a proxy for systemic liquidity conditions--was at INR 2.22 trillion on Friday, the highest in three weeks due to advance tax outflows. Evolving liquidity conditions this week would be key to taking bets on swap rates maturing within six months, which are likely to fall sharply after March, dealers said.

OUTLOOK

On Tuesday, swap rates may take cues from the overnight movement in US Treasury yields after the release of US retail sales data, dealers said. While swap rates have not been closely tracking the movement of US Treasury yields, traders may take cues from offshore ahead of the US Federal Open Market Committee's meeting this week.

The two-day FOMC meeting starts Tuesday and is expected to hold rates steady this month. However, traders will closely watch for commentary from the committee, particularly US Federal Reserve Chair Jerome Powell.

Any statement by US President Donald Trump on tariffs and their potential impact on global trade may also impact swap rates. Short-term swaps will closely track the movement in the overnight Mumbai Interbank Offer Rate, and the impact of the RBI's open market operation auction on Tuesday in easing domestic liquidity conditions, dealers said.

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 6.08-6.20% and the five-year rate is seen at 5.90-6.03%.

End

Edited by Saji George Titus

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