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Informist, Monday, Apr. 21, 2025

 

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--India's 1-year OIS falls to 5.68%, lowest level since May 4, 2022
--India's 1-year OIS falls to 5.68%, down 36 bps in Apr so far
--India's 2-year OIS falls to 5.51%, lowest level since Apr 8, 2022
--India's 2-year OIS falls to 5.51%, down 33 bps in Apr so far
--India's 5-year OIS falls to 5.62%, lowest level since Feb 14, 2022
--India's 5-year OIS falls to 5.62%, down 29 bps in Apr so far
--India's 1-year OIS in Apr on track for biggest monthly fall in 5 years
 

 

MUMBAI/NEW DELHI – The current month is likely to be the best for the one-year overnight indexed swap rate since the COVID-19 pandemic in April 2020. The benchmark rate for near-term interest rate expectations has fallen 35 basis points so far in April to 5.69%, reflecting at least 50 basis points of further rate cuts in 2025.

 

Swap rates maturing in up to a year have been coming down steadily through 2025 after the Reserve Bank of India's Monetary Policy Committee's cut the repo rate by 25-bps each in February and April, to 6.00%. However, longer-term interest rate expectations have shifted substantially only after the rate-setting panel changed its stance to 'accommodative' earlier this month, signalling it would debate only cutting rates or keep the status quo going ahead.

 

The change in stance has led to widespread expectations of a rate cut at the next policy review in June, followed by one in either August or October. The one-year OIS rate is now at its lowest level since the MPC's off-cycle rate hike on May 4, 2022. The most bullish traders are still receiving swap rates on the view growth and inflation will both undershoot RBI forecasts and a further 100-bps of rate cuts are possible. The two- and five-year swap rates are on track to fall the most in a month since March and December 2023, respectively, with absolute levels also at their lowest since early 2022.

 

"There is a very strong momentum in the market, pricing in at least 50 basis points of further rate cuts (in 2025)," a trading head at a private bank said. "Now that the MPC has changed its stance to accommodative, the market is running ahead and even looking at a terminal rate of even 5.00-5.25%." 

 

The RBI projects India's GDP to grow 6.5% in 2025-26 (Apr-Mar), with traders expecting the actual reading to be closer to 6% due to the fallout of tariffs announced by US President Donald Trump earlier this month. This would make the case for further repo rate cuts by the Monetary Policy Committee of the RBI, which has led to offshore traders also receiving fixed rates, including on Monday, dealers said.

This is despite the 10-year US Treasury yield remaining above 4% for most of the past six months, and swap rates already reflecting some chances of the repo rate below 5.50%. A key change has been that the MPC's rate cuts have been accompanied by robust durable liquidity infusion by the RBI, including through nearly INR 4 trillion of gilt purchases and $25 billion worth of dollar/rupee swaps. The overnight Mumbai Interbank Offer Rate--the floating rate of the OIS contract—has been set below the repo rate of 6.00?ter the RBI cut rates. The overnight MIBOR rate was set at or above the repo rate for over four months until Mar. 27.

 

"The five-year is currently pricing in a repo rate of 5.25%, this is much lower than the terminal repo of 5.50-6.00% we were expecting earlier," a dealer at a private bank said. "Because the RBI provided so much liquidity, it is as if there's a pseudo-rate cut. We've gotten this indication that RBI wants to pull down rates as soon as possible and it will do anything to ensure that. We never know when the next OMO (or any other liquidity infusing measure) will be announced." The five-year swap rate is seen falling to 5.56%, after which traders would unwind received positions at a profit, dealers said. 

 

In the Jan-Mar quarter, despite a 25 bps rate cut in February, overnight borrowing rates remained elevated due to seasonal pressure in systemic liquidity and the RBI's dollar sales until February. However, systemic liquidity has been in a surplus in the new financial year, pulling down borrowing costs. Moreover, at the post-policy press conference on Apr. 9, RBI Governor Sanjay Malhotra had said that the aim of the central bank was to ensure proper transmission of the repo rate and that it would ensure a sufficient liquidity surplus in the banking system.  End

 

US$1 = INR 85.13

 

Reported by Cassandra Carvalho and Aaryan Khanna

Edited by Ashish Shirke

 

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