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Informist, Wednesday, Mar. 19, 2025

By Srijita Bose

MUMBAI – The five-year overnight index swap rate ended at a 22-month low due to a fall in US Treasury yields and corporate houses receiving swap rates, dealers said. The Reserve Bank of India's announcement on Tuesday of another INR 500-billion open market operation to purchase gilts is expected to ease liquidity conditions and help bring down overnight rates quicker after the widely-expected rate cut by the Monetary Policy Committee in April.

The one-year swap rate ended at 6.10%, against 6.11% on Tuesday. The five-year swap ended at 5.92%, the lowest since May 17, 2023, against 5.96% at close on Tuesday.

A large public sector power finance company is likely to have received the two- and five-year swap rates to hedge its interest rate risk after raising bonds in the primary market, dealers said. The two-year swap rate ended at 5.88%, against 5.90% Tuesday.

Meanwhile, the yield on the 10-year benchmark US Treasury note eased to 4.29% at 1700 IST from 4.32% on Tuesday. The five-year swap tracked the fall in US yields and inched lower as offshore traders received fixed rates, dealers said. However, foreign traders refrained from placing agressive bets before the outcome of the US Federal Open Market Committee's meeting at 2330 IST, they said. Though the committee is widely expected to hold rates steady, 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.

"There is good receiving from corporates," a dealer at a private bank said. "US yields are also down, so some offshore receiving is also there but not much before FOMC (decision)."

Some traders also expect the overnight Mumbai Interbank Offered Rate to fall to near 5.50% by the end of 2025, due to 50 bps of further repo rate cuts from the current 6.25% and the RBI ensuring a durable liquidity surplus. On Wednesday, the rate was set at 6.45%, against 6.40% on Tuesday, and is expected to be set above the repo rate until the end of March due to tight liquidity with further tax outflows scheduled later this week. As liquidity conditions turn favourable from the first week of April, traders are likely to shift their attention to receiving swaps maturing in less than a year. The three-month swap rate, which ended at 6.27%, is still showing only a marginal decline in overnight rates through its maturity, dealers said.

"I think it (the rise in MIBOR) is keeping the short-end rates from falling, above 1-year rates have been falling since last one week, but we're not seeing such a movement happen in one-month, two-month, three-month (swap rates)," a dealer at a private bank said.

OUTLOOK

On Thursday, swap rates may take cues from the overnight movement in US Treasury yields after the US Federal Open Market Committee's rate decision at 2330 IST Wednesday. The panel is expected to hold rates steady. 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 Offered Rate, with the RBI's proactive liquidity measures seen keeping the rate in check for the rest of March, 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 provide cues to swaps. The one-year swap rate is seen at 6.08-6.20% and the five-year rate at 5.90-6.03%.

End

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

Edited by Avishek Dutta

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