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Informist, Tuesday, Apr. 15, 2025

By Srijita Bose

MUMBAI – Most overnight indexed swap rates for maturities up to one year fell Tuesday as traders continued to bet on a deeper rate-cutting cycle by the Reserve Bank of India's Monetary Policy Committee, dealers said. However, the five-year swap rate ended steady as US Treasury yields retraced their earlier fall, they said. The one-year swap rate ended at 5.75%, lower than 5.78% Friday. The five-year swap ended at 5.71%, flat from Friday.

The swap market was pricing in rate cuts of 50 basis points after the rate cut announced by the RBI on Apr. 9, but in the last few days the market has started betting on rate cuts of 75-100 basis points by the end of 2025, dealers said.

Shorter tenure swaps maturing up to one year fell on rate cut hopes, and as the overnight Mumbai Interbank Offered Rate--the floating leg in an OIS contract--remained below the policy repo rate, they said. However, rates on the one-month swap remained steady as traders booked profits after rates fell last week, they said. 

The release of CPI inflation during market hours did not change rate cut views, dealers said. CPI inflation in March fell to an over-five-year low of 3.34%. The print was lower than the consensus view of 3.6% in an Informist poll. The print did not change expectations of further rate cuts and traders said the fall was largely priced in. 

"OIS is currently pricing in 60 bps of cuts... We don't see any further rally in five-year OIS, 5.70% is the level after which we'll move upwards mostly," a trader at a primary dealership said. "There was just some churning and profit-booking in OIS today (Tuesday)."

Meanwhile, the yield on the 10-year benchmark US Treasury note fell to 4.34% at 1030 IST from 4.44% at 1700 IST Friday as US President Donald Trump excluded electronic devices, including smartphones and computers, and semiconductors from reciprocal tariffs. The fall in US yields led offshore traders to receive fixed rates in the five-year swap, dealers said. However, an intraday rise in US yields to 4.40% led traders to pay by the end of the day, dealers said. 

Traders also paid fixed rates for five-year swaps while receiving in shorter-tenure contracts such as two-year swaps to reduce the overall exposure as global uncertainties are expected to keep rates more volatile on longer-tenure contracts, dealers said. Notional trade volumes on the two-year swap were the second-highest among different tenures at INR 30.15 billion against a total volume of INR 161.75 billion across tenures, on the Rupee Derivatives Dealing System of the Clearing Corp. of India. Volumes on the five-year swaps were the highest, as they usually are. Traders also played on spreads across tenures as the price value of a move of one basis point in a shorter-tenure contract is lower than that on a longer-tenure contract, they said. 

"There was a lot of volatility in swaps... we saw some offshore flows in the morning but towards the end, most of it was paid out because of the rise in US yields," a dealer at a private bank said. "There is not much scope in swaps but further rate cut expectations could be priced in so that could lead to a fall... but depends on how global factors play out."

OUTLOOK

Wednesday, 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 if expectations of further rate cuts firm up, it could lead to a fall in swaps, they said.

Traders will also keep an eye on any updates on the ongoing US-China trade war. Any sharp rise in US yields is expected to lead to paying in Indian swaps, especially in long-term contracts, dealers said. Meanwhile, short-term swaps on Wednesday will closely track the overnight Mumbai Interbank Offered Rate, which is expected to remain near the repo rate, and any further liquidity measures by the RBI.

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 5.65-5.80% and the five-year at 5.63-5.82%.

End

Edited by Saji George Titus

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