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Informist, Friday, Apr. 4, 2025

By Vidhushi RajPurohit

MUMBAI – The overnight indexed swap rates fell on the back of a sharp slump in US Treasury yields, dealers said. Additionally, traders receiving interest across swap tenures remained intact ahead of the Reserve Bank of India's monetary policy review next week. The market widely expects the Monetary Policy Committee to cut the repo rate by 25 basis points on Wednesday and soften its policy stance to accommodative. 

"Today's momentum was directed by US yields, which have cooled off sharply. After the initial fall in the morning, the rates did not fall much because the market has rallied significantly in the past few days and much of rate-cut bets have also been priced in," a dealer at a private bank said. "But in short-term swap rates, there is some more space for more easing."

The one-month swap rate fell to its lowest closing level since October 2022, at 6.04%. The one-year swap rate ended at 5.91% against 5.98% on Thursday, its lowest close since May 4, 2022. The five-year swap ended 8 basis points lower at 5.73%, also a fresh low in over three years.

After an overnight fall of 9 basis points, the yield on the benchmark 10-year US Treasury note slid by another 11 bps intraday to 3.88%--the lowest level since Oct. 4. US yields fell on fears that the reciprocal tariffs announced by US President Donald Trump will push the world's largest economy into a recession, leading to further rate cuts by the US Federal Reserve. A further fall came during Indian market hours on reports that China has imposed retaliatory tariffs on imports from the US, sparking fears of a widespread trade war. 

Traders across segments received swap rates, with the decline in US yields leading to strong flows from offshore, dealers said. Strong receiving interest was also seen in the 3-month swap contract as the notional trading volume surged to INR 29.20 billion, the third-most traded swap contract. 

Dealers said there was some unwinding of receiving in the early trading hours in certain contracts, which prevented rates from falling more. The consensus view is that the MPC will cut the current repo rate of 6.25% by at least 50 basis points in 2025, with expectations of another rate cut rising in the last two days after the tariff announcements. The 5-year swap contract fell to a low of 5.72% before some traders unwound their received positions at a profit, dealers said.

"The swap rates are already pricing in around three rate cuts, so any more fall from the current level is not sustainable with just the rate-cut view. Which is why we are seeing the (swap) rates move back up after hitting sharp lows," a dealer at a primary dealership said. "But an offshore trigger like US yields can lead to sharp flows and rates might move down." To gauge further offshore receiving interest, traders are awaiting the US employment report for March, due after market hours.

OUTLOOK

Swap rates are not traded on Saturday. On Monday, swap rates may take cues from the movement in US Treasury yields after the release of the US economic data, dealers said. The movement in government bond yields may also lend cues to swap rates. The data released at 1900 IST showed US non-farm payrolls rose 228,000 in March, against a Dow Jones consensus estimate of 140,000. However, the unemployment rate rose to 4.2% from 4.1% in February.

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.

Crude oil prices could also be a trigger for swaps if they move significantly, with the fall on Thursday and Friday aiding swaps, dealers said. Any sharp movement in the rupee's dollar exchange rate may also provide cues. The one-year swap rate is seen at 5.90-5.95% and the five-year rate at 5.70-5.75%.

End

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

Edited by Saji George Titus

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