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Informist, Thursday, Mar. 20, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended off lows as some traders sought to hedge their exposure after picking up government bonds heavily, dealers said. Swaps slumped in early trade 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, they said.

The one-year swap rate ended at 6.10%, flat against Wednesday, after hitting a low of 6.07% intraday which is the lowest seen since Aug. 17, 2022. The five-year swap ended at 5.87%, the lowest since Mar. 17, 2022, against 5.92% at close on Wednesday. 

The yield on the US 10-year benchmark note fell to 4.23% from 4.30% at 1700 IST Wednesday. Late on Wednesday, the US Federal Open Market Committee announced its decision to keep the policy rate unchanged, in line with the market's expectations. However, US Fed officials continued to guide 50 basis points of rate cuts in 2025.

"There was good offshore receiving because of US yields, " a dealer at a private bank said. "Also, gilt yields have finally come down and rate cut expectations are also being priced in, so onshore guys received as well." 

The five-year swap rate slumped as stop-losses were triggered at 5.88% after traders received fixed rates due to the fall in US yields and increased bets on the rate cut by the RBI Monetary Policy Committee, dealers said. Traders almost unanimously expect the panel to cut the repo rate at its upcoming meeting in April, with nearly 75 bps more cuts in total over the next 12 months, they said. Some traders are also betting on the RBI's rate-setting panel changing its stance to 'accommodative' from 'neutral' at the April policy review to signal its commitment to a looser monetary policy, dealers said.

Swap rates also fell on likely receiving by corporate houses, dealers said. A large public-sector power finance company likely received fixed rates to hedge its interest-rate risk after raising bonds in the primary market, they said. The two-year swap rate ended at 5.83%, against 5.88% Wednesday, the lowest since Apr. 27, 2022.

Further, with the gilt yields finally falling and pricing in rate cuts, traders took advantage of the arbitrage, leading to a fall in swap rates, dealers said. The spread of the five-year benchmark gilt's yield over the five-year swap rate has widened to 66 basis points from 53 bps on Jan. 31.

Meanwhile, rates on shorter tenure swaps maturing within a year remained higher as the overnight Mumbai Interbank Offered Rate -- the floating rate in an OIS contract -- was set at 6.45%, dealers said. The overnight MIBOR 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. The one-month swap rose to 6.48% from 6.45% on Wednesday on expectations of tight liquidity, dealers said.

"There is still pressure on short-term (swaps), as long as liquidity does not improve we won't see them fall from here," a dealer at another private bank said. "These swaps will see a correction once the rate cut happens in April because from mid-April liquidity will also go back to surplus."

OUTLOOK

On Friday, swap rates may take cues from the overnight movement in US Treasury yields after the release of the US jobless claims report for the week ended Saturday. Swaps may also react to movement in bonds during the day, dealers said. 

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 6.00-6.13% and the five-year rate at 5.80-6.95%.

End

Edited by Saji George Titus

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