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Informist, Thursday, Apr. 3, 2025

By Aaryan Khanna and Vidhushi RajPurohit

NEW DELHI – Overnight indexed swap rates ended lower after US President Donald Trump announced reciprocal tariffs on several economies, including India. The expected hit to growth in India and a possible recession in the US aided bets of a deeper rate cut cycle than currently priced in in both economies, and led to a fall in the five-year swap rate amid high volumes, dealers said.

The one-year swap rate ended at 5.98% against 5.99% on Wednesday, marking its lowest close since May 4, 2022. The five-year swap ended at 5.81%, against 5.83% Wednesday, hitting a three-year intraday low of 5.78%.

The five-year swap rate fell sharply at the open, tracking an overnight fall in US Treasury yields. The yield on the 10-year US Treasury note fell to 4.06% at 0915 IST from 4.14% at 1700 IST on Wednesday. US yields fell as investors fled to safe-haven assets such as US debt, amid fears of a global trade war and an economic slowdown after Trump announced reciprocal tariffs on over 60 countries and territories. Trump announced a 26% tariff on imports from India, with White House documents showing a 27% tariff rate, set to go into effect on Apr. 9. Offshore traders were aggressively receiving India's two- and five-year OIS rates through the day, dealers said.

Tariffs would likely have a negative impact on India's growth, spurring a quicker or deeper rate cut cycle, dealers said. Emkay Global said in a report that India's exports to the US could drop by $30 billion-$33 billion, equating to 0.8-0.9% of GDP, with the tariff imposition, not adjusting for cross-country responses. Dealers said that the Monetary Policy Committee members' commentary in the February policy minutes had shown a shift in focus to supporting growth rather than bringing down inflation, which was expected to comfortably undershoot the 4.4% projected in Jan-Mar.

However, the five-year swap rate ended off lows as domestic traders unwound their received fixed rate bets in swaps. Swap rates maturing between one and five years were already pricing in 50 bps of rate cuts in 2025, as well as a stance change by the MPC on Wednesday to 'accommodative' from 'neutral'. Traders preferred to book profits at the day's lows, before taking cues from the commentary at the policy outcome next week.

"The positives are piling up, and good times are set to stay for India's rates," a dealer at a private bank said. "But there is also a push and pull that accompanies the market whenever it is trading at such historical levels, I think people are unwinding looking at technicals and three-year lows and all such levels."

Meanwhile, short-term swaps continued to inch downward as the overnight Mumbai Interbank Offered Rate – the floating leg of the OIS contract – fell to 6.10% on Thursday, below the policy repo rate of 6.25%. The RBI's durable liquidity infusion and seasonal inflows in April are expected to keep banking system liquidity comfortable, and the overnight MIBOR typically below the repo rate going ahead, dealers said.

Moreover, should the MPC change stance, banking system liquidity is likely to remain heavily in surplus, while also giving more strength to bets of further repo rate cuts in India, dealers said. On Wednesday, the central bank absorbed INR 1.93 triliion of liquidity on a net basis, the most in four-and-a-half months. For over three months till the last few days in March, the proxy for banking system liquidity showed a deficit, which had held up the overnight MIBOR above the repo rate.

"There were no fresh flows except in the one month, which you can see from the volumes," a dealer at a primary dealership said. "That tenure changes every day in the days leading up to any live policy. The rest of the short-end is not reacting much as people figure out the impact of the tariffs over time."

OUTLOOK

On Friday, swap rates may take cues from overnight movement in US Treasury yields, dealers said. The movement in government bond yields on may 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 keeping the rate near the repo rate of 6.25%, dealers said. Any further improvement in liquidity conditions will also be closely tracked by traders, especially with the RBI's open market operation auction to buy INR 200 billion worth of gilts scheduled to add liquidity to the banking system Friday.

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 5.95-6.06% and the five-year rate at 5.75-5.88%.

End

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

Edited by Deepshikha Bhardwaj

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