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Informist, Friday, Apr. 11, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower Friday despite a rise in US Treasury yields as traders received fixed rates on expectations of a deeper rate-cutting cycle by the Reserve Bank of India's Monetary Policy Committee, dealers said. The fall in the overnight Mumbai Interbank Offered Rate also dragged down OIS rates, they said. 

The one-year swap rate ended 4 basis points lower at 5.78% Friday. Intra-day, the rate fell to 5.76%, the lowest level since May 4, 2022. The five-year swap ended at 5.71%, the lowest closing level since Feb. 18, 2022, compared with 5.75% on Wednesday. Financial markets were shut on Thursday for Mahavir Jayanti.

The overnight MIBOR, the floating leg in an OIS contract, was set at a 28-month low of 5.85% on Friday compared with 6.02% on Wednesday. The Reserve Bank of India's Monetary Policy Committee had on Wednesday cut the repo rate by 25 bps to 6.00%. Traders expect the overnight MIBOR to be consistently set below the policy rate as the central bank looks to ensure surplus liquidity in the banking system. Rate-sensitive swap rates maturing up to one year fell the most tracking the benchmark rate, which was consistently set above 6.25% until the end of March.

Traders now expect the rate cut quantum to be higher and the timing to be shifted forward with the MPC adopting an 'accommodative' stance on Wednesday, dealers said. Traders said the terminal policy rate in the current cycle could be lower than the 5.50% priced into swap rates till Wednesday. Economists at Nomura and Kotak Mahindra Bank now see the repo rate at 5.00% by the end of 2025 due to concerns over growth amid the trade tensions between the US and China, the world's two largest economies.

"Today, offshore flows also looked likely," a dealer at a private bank said. "But it could just be domestic guys receiving because people are now looking at a deeper rate-cut cycle and some are seeing the repo as low as 5.00% by the end of the year."

The yield on the US Treasury note has risen to 4.43% from 4.39% at 1700 IST Wednesday, which likely led to the five-year swap rate opening higher. US yields rose after President Donald Trump Wednesday increased the effective tariffs on China to 145% while announcing a 90-day pause on higher reciprocal tariffs and temporarily reducing the rate to 10% on all other major import partners. China retaliated Friday by slapping back an effective 125% on US goods.

While this led foreign portfolio investors to sell gilts and move to safer assets, they likely received fixed rates in swaps to hedge against these sales on expectations of further rate cuts by the RBI's rate-setting panel, dealers said. FPIs have sold over INR 130 billion worth of gilts through the fully accessible route since Apr. 2, according to Clearing Corp. of India data.

"No one will want to miss out on the opportunity even though there is so much global uncertainty," a dealer at a primary dealership said. "Today (Friday), there were both onshore and offshore flows even though swaps are already pricing two more rate cuts." 

OUTLOOK

Swaps are not traded on Saturday. Money markets are shut on Monday for Babasaheb Ambedkar Jayanti. On Tuesday, swaps may take cues from movements in US Treasury yields at open, dealers said. Traders are already expecting repo rate cuts of another 50 bps by the end of 2025, but expectations of further rate cuts could lead to a fall in swaps, they said.

Traders will also keep an eye on the next steps the US and China will take in their ongoing trade war. A further rise in US yields is expected to lead to paying in Indian swaps, especially in the five-year contract, dealers said.

Short-term swaps on Tuesday will closely track movement in the overnight Mumbai Interbank Offered Rate and any further liquidity measures by the RBI. The announcement of an additional INR 400 billion open market operation auction to buy gilts, over and above the INR 800 billion already announced for April, after market hours Friday may lead to a further fall in overnight rates, dealers said.

With increasing expectations of a deeper-than-expected rate-cutting cycle, swaps maturing in 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. The one-year swap rate is seen in the range of 5.65-5.85% and the five-year in 5.63-5.82%.

End

Edited by Saji George Titus

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