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Informist, Wednesday, Mar. 26, 2025

By Cassandra Carvalho

MUMBAI – Overnight indexed swaps ended lower Wednesday due to an overnight fall in US Treasury yields, and tracking the slump in the government bond yields during the day, dealers said. Traders unwound some received fixed rate bets at the day's lows on the view that rate cut pricing was too aggressive.

The one-year swap rate ended at 6.10%, against 6.12% on Tuesday. The five-year swap ended at 5.93%, against 5.95% Tuesday. Swap rates reversed gains seen the past week, as a fall in gilt yields furthered the downward movement of swap rates.

Swap rates opened lower, tracking an overnight fall in US yields. The yield on the benchmark 10-year US Treasury note fell to 4.34% at 1700 IST, from 4.36% at the same time Tuesday, hitting a low of 4.30% overnight. US yields fell after the confidence index fell more than expected in March, while January and February housing indicators printed in line with or lower than forecast. 

"I think swaps have been well-bid today (Wednesday), we've been tracking US yields only...," a dealer at private bank said. Overseas trading interest had ebbed earlier in the week, and was characterised by unwinding received positions – the pattern reversed Wednesday, dealers said.

Liquidity conditions eased slightly, bringing down swap rates maturing under one year. The net liquidity injected by the central bank--a proxy for liquidity deficit--declined to INR 1.57 trillion on Tuesday from Monday's INR 1.93 trillion. The overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – fell 10 basis points from Tuesday to 6.31%, but remained above the policy repo rate of 6.25%. The one-month swap rate attracted large volumes Wednesday near the end of the financial year on Monday, with its total notional volume rivalling that of the preferred 5-year swap contract. 

Even as notional trade volumes were tepid, offshore traders received fixed rates in a push to Indian assets, though some preferred to invest in gilts over swap rates, dealers said. The 10-year benchmark bond yield ended at 6.60%, its lowest closing level since January 2022. Bond yields fell sharply Wednesday on expectation that the central government's borrowing plan for Apr-Sept would be lower than usual, at below 55% of the full year aim.

However, the fall in swap rates was limited as at least two rate cuts by the Reserve Bank of India's Monetary Policy Committee in 2025 were already priced in, dealers said. Expectation of a 25-basis-point rate cut and a softening of the policy stance to 'accommodative' from 'neutral' had also driven down the two- and five-year swap rates down to three-year lows last week.

"We are well positioned for what the RBI is likely to do over the next few months," a dealer at a primary dealership said. "At least 50 bps of rate cuts are going to happen, and have already been priced in, and I think once liquidity becomes positive, we will see another leg down (in swap rates)."

OUTLOOK

On Thursday, swap rates may take cues from the overnight movement in US Treasury yields. Swaps may also react to the movement in government bond yields 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. US President Donald Trump Wednesday said there would be "not too many" exceptions to his imposition of reciprocal tariffs on imports from US trade partners. 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 5.85-6.00%.

End

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

Edited by Tanima Banerjee

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