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Informist, Monday, Mar. 24, 2025

By Srijita Bose

MUMBAI – The five-year overnight indexed swap rate was up as US Treasury yields rose from the previous close. Traders had already priced in a rate cut by the Reserve Bank of India's Monetary Policy Committee in April, and paid swap rates to hedge their increasing government bond exposure, dealers said.

The one-year swap rate ended at 6.10%, against 6.09% on Friday. Rates on most shorter-tenure swaps maturing up to one year remained largely steady, though some offshore traders paid fixed rates in light volumes earlier in the day, dealers said. Meanwhile, the five-year swap ended at 5.90%, against 5.88% Friday.

The yield on the 10-year benchmark US Treasury note rose to 4.30% at 1700 IST from 4.23% at the Indian market close on Friday as traders favoured risk assets. Analysts feared reciprocal tariffs threatened by US President Donald Trump's administration will result in higher inflation prints, both in the US and the rest of the world. With reports that the tariffs, scheduled to be effective Apr. 2, may be more diluted, the yields on safe-haven US Treasury yields rose.

"It doesn't make sense right now to take a naked received position in OIS right now because already three rate cuts are priced in," a dealer at a private bank said. "Also, US yields are still hovering near 4.20-4.30% and global uncertainties are also waiting to play out, so some paying is coming because of that." The two-year swap rates rose 5 basis points to 5.88% Monday. 

Traders are widely expecting the RBI's rate-setting panel to lower the repo rate by 25 bps in April to 6.00%, which is fully priced in, along with a change in the policy stance to 'accommodative' from 'neutral', dealers said. Market expectations of a deeper rate cut cycle have ballooned with soft inflation prints and a stronger rupee over the past two weeks, with the one-year OIS pricing in nearly 75 bps rate of repo rate cuts over the next 12 months.

Moreover, traders had already received swap rates earlier in March due to tight funding costs preventing outright gilt exposure, but are now picking up gilts at levels considered lucrative while booking profits on their OIS positions, dealers said. This was due to expectations that liquidity conditions would become comfortable near the end of the month due to RBI's continuous liquidity infusion and the government's month-end flows, they said. Despite goods and services tax outflows on Friday, and the RBI's net liquidity injected at a near two-month high, the overnight Mumbai Interbank Offered Rate – the floating leg of the swap contract – fell 3 bps to 6.41% on Monday.

While it did not have a significant impact on rates, traders' confidence in further rate cuts and a stance change strengthened when the rupee ended at 85.6350 a dollar, its highest close in 2025. Traders and analysts had feared the MPC may hold off on a deep rate-cutting cycle to protect the rupee. Meanwhile, with the two- and five-year swap rate falling to three-year lows last week, traders said the recent fall in rates was overdone and too optimistic on rate cuts, dealers said.

"Today (Monday), the three-year swap was paid because of higher cut-off at FX swap auction," a dealer at another private bank said. "Also, to hedge positions, people are now chosing to pay the five-year swap instead of taking an outright short on bonds because there is still some 2-3 bps space left for bonds to fall before a rate cut."

OUTLOOK

On Tuesday, swap rates may take cues from the movement in US Treasury yields. Swaps may also react to the movement in government bonds during the day, dealers said.

Any news on the US government's proposed 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 the seasonal tightness in 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 5.83-6.00%.

End

US$1 = INR 85.63

Edited by Avishek Dutta

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