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Informist, Friday, Mar. 21, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended steady as traders had 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. Already at multi-year lows, traders paid swap rates to hedge their increasing government bond exposure, pushing up the five-year rate off lows.

The one-year swap rate ended at 6.09%, the lowest since August 2022, against 6.10% Thursday. The five-year swap ended at 5.88%, against 5.87% Thursday, after hitting the day's low of 5.85%, the lowest in over three years.

"Swaps had received more than it was supposed to the previous day and now rate cuts are fully priced in, so some paying was there to reverse the extra amount received," a dealer at a private bank said. "There is not much scope of a fall from these levels till liquidity improves and gilt yields fall further."

The two- and five-year swaps fell in early trade as both offshore and onshore traders received fixed rates. However, the early fall was reversed as traders sought to hedge their exposure after picking up government bonds heavily, dealers said. The five-year benchmark gilt yield has fallen 10 basis points this week, while the 10-year gilt yield is down over 7 bps. Traders had already received swap rates earlier in March due to tight funding costs preventing outright gilt exposure, but as liquidity conditions remain comfortable near the end of the month, the focus has shifted to picking up gilts at levels considered lucrative while booking profits on their OIS positions, dealers said.

Traders are widely expecting the MPC to lower the repo rate by 25 basis points in April to 6.00%, which is fully priced in, dealers said. Traders are expecting a total of 75 bps rate cut over the next 12 months, with some traders expecting the RBI's rate-setting panel will change its policy stance to 'accommodative' from 'neutral' to guide for easing monetary conditions, they said.

With the last major tranche of tax outflows over on Friday, and the RBI scheduled to infuse nearly INR 1.4 trillion of durable liquidity next week through gilt buys and a foreign exchange swap, dealers expect shorter tenure swaps maturing within a year to fall slightly. However, on Friday some traders also paid in these contracts to square off earlier received positions and reduce their interest-rate risk going into the new financial year, dealers said. 

"Short-term swap today (Friday) saw some paying because people don't want to carry their risks into the new year," a dealer at another bank said. "But they will closely track the MIBOR (Mumbai Interbank Offer Rate), and with month-end spendings coming in... we could see some fall in them (swaps)."

OUTLOOK

Swaps are not traded on Saturday. On Monday, swap rates may take cues from the movement in US Treasury yields. Swaps may also react to movement in government 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 below the Marginal Standing Facility rate of 6.50% 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 5.80-5.95%.

End

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

Edited by Saji George Titus

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