India IRS Review
1-mo rate collapses to match rate cut view as MIBOR falls
This story was originally published at 19:18 IST on 27 March 2025
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By Aaryan Khanna
NEW DELHI – The one-month overnight indexed swap rate slumped to its lowest level since January 2023 to reflect the widespread expectation of a repo rate cut in April as liquidity conditions and overnight rates eased, dealers said. The near-term swap rate ended 11 basis points lower on Thursday at 6.35%.
On Thursday, the overnight Mumbai Interbank Offered Rate was set below the repo rate for the first time since Nov. 13, signalling comfortable rupee liquidity conditions near the end of the financial year on Monday. The overnight MIBOR is the floating leg on the OIS contract. The benchmark rate for overnight uncollateralised lending was set at 6.24% on Thursday, just below the repo rate of 6.25%, and down from 6.31% on Wednesday. On an absolute basis, it was the lowest since February 2023.
"It made no sense to me that people have kept paying in the one-month swap, it was bound to correct since the repo is going to be at 6.00% in two weeks," a dealer at a foreign bank said. "It was obvious that liquidity would be in surplus by March-end, you can do the math, MIBOR is going to be set comfortably in April."
With the settlement of the Reserve Bank of India's dollar/rupee buy/sell swap worth $10.04 billion and INR 445.41-billion open market operation auction, the net liquidity injected -- a proxy for the systemic liquidity deficit -- fell to INR 407.88 billion on Wednesday, the lowest since Mar. 4. The overnight MIBOR was last set below the repo rate on Nov. 13, when the banking system was flush with funds and the RBI absorbed over INR 2 trillion, data showed.
The fall in the overnight MIBOR helped ease swap rates for up to two years. Moreover, the fall has come at a time when liquidity is typically strained, highlighting the comfortable liquidity conditions even at the financial year-end due to the RBI's aggressive liquidity infusion, dealers said. Swap rates in nine months and above were already fully pricing a 25-basis-point repo rate cut in April, as well as a high chance of a policy stance changing to 'neutral' from 'accommodative', dealers said. The one-year swap rate ended at 6.08%, against 6.10% on Wednesday, while the five-year swap ended at 5.94%, against 5.93% Wednesday.
The five-year swap rate inched up as some traders unwound their received fixed rate bets to hedge their underlying gilt holdings, as well as noting the rise in US Treasury yields, dealers said. The 10-year US yield rose to 4.39% at 1700 IST Thursday from 4.34% on Wednesday.
"There was two-way activity in the five-year swap rate," a dealer at a private bank said. "Ultimately, the impact of the US yields won out, and anyway traders were more focused on gilts today (Thursday)." The five-year swap rate had hit a low of 5.90% during the day.
OUTLOOK
On Friday, 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.
Short-term swaps will closely track the movement in the overnight MIBOR, with the RBI's proactive liquidity measures seen keeping the rate near the policy repo rate of 6.25%, dealers said. The overnight MIBOR on Thursday fell below the repo rate for the first time in over five months.
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.
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%.
At 1700 IST | WEDNESDAY | |
1-year OIS | 6.08% | 6.10% |
2-year OIS | 5.88% | 5.89% |
5-year OIS | 5.94% | 5.93% |
2-year MIFOR | 6.21-6.33% | 6.19-6.31% |
5-year MIFOR | 6.40-6.52% | 6.39-6.51% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Saji George Titus
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