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Informist, Wednesday, Apr. 2, 2025

By Vidhushi RajPurohit

MUMBAI – Overnight indexed swap rates across most tenures fell to their lowest levels in nearly three years as traders firmed up their bets on a repo rate cut and a change in monetary policy stance next week, dealers said. Easier liquidity conditions also helped them place larger bets on a change in stance and the repo rate being cut by more than 25 basis points, especially after the Reserve Bank of India announced Tuesday that it will buy INR 800 billion of gilts in April via open market auctions.

The one-year swap rate on Wednesday ended 5 basis points lower from Friday at 5.99%--the lowest closing level since May 11, 2022. The five-year swap ended 8 bps lower at a three-year low of 5.83%.

Liquidity conditions have improved sharply in recent days, with the RBI on Tuesday absorbing INR 1.42 trillion on a net basis--the most since Nov. 18. The improved liquidity conditions led to the overnight Mumbai Interbank Offered Rate--the floating leg of the OIS contract--to slide on Wednesday to 6.33% from 7.20% Friday. Traders expect the overnight MIBOR rate to fall further and settle near the repo rate by the time RBI Governor Sanjay Malhotra announces the MPC's decision on Apr. 9. The one- and three-month MIBOR were close to one-month lows of 7.03% and 7.17%, respectively.

"There is a MIBOR fixing in the OIS rates as the (swap) rates are now aligning with the fall in MIBOR rates," a dealer at a primary dealership said. "Liquidity has improved sharply, so there is an increase in receiving interest and it might persist till the policy day."

Despite the improved liquidity conditions, the one-month swap contract was not traded on Wednesday. Dealers said the contract had already priced in a 25 bps repo rate cut.

Traders are of the view that the swap rate curve might steepen in the next two to three months, with rates on short-tenure contracts expected to fall more than those on contracts maturing in more than one year. While the move will be gradual, the pace of the steepening will depend on the MPC's commentary next week, dealers said.

"Pricing-in of a rate cut is mostly done. Any fall from here is what the market is looking for the future trajectory of policy rates and liquidity conditions and therefore what statement the MPC gives is now keenly watched," a dealer at a private bank said. The one-year swap contract is currently pricing in a rate cuts worth 45 bps, dealers said.

OUTLOOK

On Thursday, swap rates may take cues from overnight movement in US Treasury yields after President Donald Trump announces the reciprocal tariffs he has been warning of for several weeks, dealers said. The impact of the movement in US yields will depend on the precise nature of the tariffs the US imposes on India, they said. The movement in Indian government bond yields on Thursday will also lend cues to swap rates.

Short-term swaps will closely track the movement in the overnight MIBOR, with the RBI's liquidity measures seen bringing the rate near the policy repo rate of 6.25%, dealers said. Any further improvement in liquidity conditions will also be closely tracked by traders.

Crude oil prices could also be a trigger for swaps if they move significantly, dealers said, while any sharp movement in the rupee's dollar exchange rate may also provide cues. The one-year swap rate is seen at 5.97-6.06% and the five-year rate at 5.80-5.88%.

End

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

Edited by Saji George Titus

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