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Informist, Friday, Mar. 28, 2025
 

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended sharply lower on Friday, led by swaps maturing in up to six months as March ended and the expected spike in the overnight Mumbai Interbank Offered Rate passed, dealers said. The one-month swap rate ended at 6.14%, down 21 basis points Friday, while the two-month swap rates slumped to 6.13%, 

The swap rates traded Friday, settled on a 'T+1' basis, are traded on the basis of the overnight MIBOR--the floating leg of the OIS contract--in April. The MIBOR rate is expected to be set at or below the repo rate throughout the month, and moreover, the repo rate is widely expected to be cut by the Reserve Bank of India's Monetary Policy Committee by 25 bps to 6.00% on Apr. 9, dealers said. Swap rates maturing up to six months, which all fell 5 bps or more Friday, were only now pricing in a rate cut, they said.

The one- and two-month swap rates ended at their lowest since November 2022 and October 2022, respectively. The one-year swap rate ended at 6.04%, its lowest close since Aug. 4, 2022, against 6.08% on Thursday. The five-year swap ended at 5.91%, against 5.94% Tuesday.

"People are not used to seeing MIBOR so low at the year-end," a dealer at a private bank said. "Yesterday (Thursday), the MIBOR was below repo, and today the settlement shifted pricing to April, so there should be no suprise that one- and two-month swap collapsed when the hedging faded." The overnight MIBOR was set at 6.24% Thursday, below the repo rate for the first time after five months and at its lowest since February 2023. On Friday, the overnight MIBOR spiked to 7.20%, the highest since the last trading day of FY24.

Domestic banks had hedged some of their near-term interest rate risk in the swap rate, which got unwind at the settlement date shifted to April, dealers said. The notional traded volume on the contract jumped to INR 137.35 billion on Friday, the highest since Mar. 7. The one-month swap rate had fallen 11 bps on Thursday as well due to the comfortable liquidity.

Meanwhile, volumes on the one-, two- and five-year contracts were lower than usual as traders avoided large bets at the year-end, though all the swap rates fell. Dealers said that while at least 50 bps more of repo rate cuts in the next 12 months were priced in, hedging activity on underlying gilts fell away, which had led to traders paying fixed rates. Moreover, some traders said that they were more aggressive in betting on a stance change by the MPC to 'accommodative' in April, which should signal further rate cuts, after the first in nearly five years in February.

"The domestic rate cut is what is driving all the swaps down, because even six months ago hardly anyone in the market was thinking about a 100-bp rate cut (from the 6.50%, repo rate)," a dealer at a primary dealership said. "I do think some of the pricing is becoming a little aggressive to make a profit, but the market should have momentum before MPC, so traders would look for exits there."

Another factor helping pull down the longer-term swap rates was the receiving from offshore traders, which intensified as US Treasury yields fell. The 10-year US yield slumped to 4.33% at 1700 IST Friday from 4.39% on Wednesday.

OUTLOOK

Swaps are not traded on Saturday. Moreover, money markets are shut on Monday for Id-ul-Fitr and Tuesday for banks' annual closing of accounts. On Wednesday, swap rates may take cues from the overnight movement in US Treasury yields and 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, and is expected to remain at or below the repo rate in April as liquidity conditions ease.

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. The tariffs are set to go live on Wednesday.

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 6.00-6.12% 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 Akul Nishant Akhoury

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