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Informist, Wednesday, Apr. 9, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates fell Wednesday after the Reserve Bank of India's Monetary Policy Committee expectedly cut the repo rate by 25 basis points to 6.00% and loosened its policy stance to 'accommodative', more than cancelling out the impact of an overnight jump in US Treasury yields and continued global uncertainties, dealers said. The one-year swap rate ended 6 bps lower at 5.82%, its lowest closing level since May 4, 2022, while the five-year swap ended 2 bps down at 5.75%.

"Onshore traders received today (Wednesday) after having paid the past few days because they were too cautious," a dealer at a private bank said. "There is so much uncertainty on the global front. Despite that, domestic conditions seem supported by monetary policy easing, with more rate cuts expectations driving the fall (in swap rates)."

While Governor Sanjay Malhotra on Wednesday admitted there were risks to India's economy from the global tariff war--the RBI cut its GDP growth forecast for 2025-26 (Apr-Mar) by 20 bps to 6.5%--the comfort on the price front led to the central bank lowering its CPI inflation projection by 20 bps to 4.0% for the current financial year, potentially opening up more easing space in the coming months. Malhotra's assurance that the RBI will ensure sufficient system liquidity in the ballpark of 1% of their net demand and time liabilities also aided traders' sentiment. 

Earlier in the day, the yield on the 10-year US Treasury note surged to as high as 4.52% from 4.20% at 1700 IST Tuesday on weak demand at Tuesday's US governent debt auction and due to upside risks to inflation from the Trump administration's reciprocal tariffs.

With US yields rising, offshore traders paid fixed rates early Wednesday, dealers said, adding that some also received fixed bets to hedge against selling in Indian government bonds before the announcement of the RBI's interest rate decision. This limited the rise in swap rates. As US bond yields cooled--falling to 4.39% by 1700 IST--offshore traders began to recieve. According to a dealer at a primary dealership, swap rates will fall "gradually", with the pace of decline hinging on how global factors pan out.

OUTLOOK

Money markets are shut Thursday for Mahavir Jayanti. On Friday, swaps may take cues from movements in US Treasury yields at open, dealers said. With traders already expecting repo rate cuts of another 50 bps or so by the end of 2025, a further fall in swaps could be restrained, they said.

Traders will also keep an eye on the next steps the US and China take in their ongoing trade war, with China retaliating to the US' latest tariff hike with one of its own, increasing import duties on American goods to 84%. In response, US Treasury yields rose to 4.45% at 1830 IST. A rise in US yields is expected to lead to paying in Indian swaps, especially in the longer-end, dealers said.

Short-term swaps on Friday will closely track movement in the overnight Mumbai Interbank Offered Rate and any further liquidity measures by the RBI. With increasing expectation of the MPC cutting the repo rate by 25 bps in both June and August, swaps maturing in the next one year may fall further, dealers said. Traders also expect the yield curve to become upward sloping as global uncertainties may keep long-term swaps volatile, they said. The one-year swap rate is seen in the range of 5.65-5.85% and the five-year in 5.68-6.00%.

End

Edited by Tanima Banerjee

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