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Informist, Tuesday, Mar. 18, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady as traders have already priced in an April rate cut by the Reserve Bank of India's Monetary Policy Committee and awaited fresh cues to trade, dealers said. Traders also awaited the outcome of the US Federal Open Market Committee meeting late Wednesday.

The one-year swap rate ended at 6.11%, flat against Monday. The five-year swap ended at 5.96%, against 5.95% at close on Monday. 

Traders are widely expecting the MPC to lower rates by another 25 basis points in April, and the one-year swap rate has fully priced it in, dealers said. Though some traders even hope for a larger rate cut in April, the swap rate does not reflect it yet, they said. The one-year swap rate has been pricing in a 50-bps rate cut in the next 12 months for a few weeks now, but traders are now waiting for favourable liquidity conditions to increase their bets on the rate-cutting cycle, they said.

"There are not many cues right now, and swaps have already moved more than gilts, so it is mostly range-bound," a dealer at a private bank said. "Volumes are also not picking up to reflect any view-based flows, everyone is waiting for triggers and today (Tuesday) most of the activity was focussed on gilts for onshore guys."

Trade volumes on shorter-tenure swaps remained muted as traders were worried about the widening of the liquidity deficit during the month. Outflows owing to direct and indirect taxes during the month could keep liquidity in deficit till March end, dealers said, though the RBI's support through variable rate repo operations is likely to keep overnight rates near the repo rate of 6.25%. The widening of the liquidity deficit was reflected in the net liquidity injected by the RBI, which rose to INR 2.43 trillion on Monday--the highest since Jan. 29.

Meanwhile, the yield on the benchmark 10-year US Treasury note rose slightly to 4.32% from 4.30% at 1700 IST on Monday. US retail sales rose 0.2% in February, for an annual pace of 3.1%, according to data released after Indian market hours Monday. The rise came despite uncertainty around US President Donald Trump's tariff policies.

Though some offshore traders paid fixed rates on the five-year swap as US yields inched up, most refrained from placing aggressive bets ahead of FOMC's decision, dealers said. The committee is widely expected to hold rates steady, though Fed fund futures are pricing in three rate cuts in 2025, according to the CME FedWatch tool. Traders will closely watch the commentary from the committee, particularly at US Federal Reserve Chair Jerome Powell's press conference after the rate decision.

"Everyone is waiting for domestic cues, even foreign investors," a dealer at a primary dealership said. "But if there is a reaction in US yields due to FOMC members' comments, then our rates will also track it."

OUTLOOK

On Wednesday, swap rates may take cues from the overnight movement in US Treasury yields, dealers said. While swap rates have not been closely tracking the movement of US Treasury yields, traders are looking ahead to the US Federal Open Market Committee's rate decision at 2330 IST Wednesday.

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