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Informist, Monday, Apr. 21, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower on aggressive bets on further rate cuts in India and easier liquidity conditions, dealers said. A spurt of paying in the latter half of the day pushed up swap rates from the day's lows while also bolstering volumes, which have been thin over the past week.

The one-year swap rate ended at 5.69%, lower than 5.73% on Thursday, and the five-year swap ended at 5.63%, down from 5.68%. Intraday, both benchmark rates hit their lowest since 2022. India's financial markets were shut on Friday for Good Friday. Total trade volumes on the Clearing Corp. of India's derivatives trading platform reached INR 308.65 billion Monday, the most since Apr. 11.

The most-traded contract, the five-year OIS, moved in a wide range of 5.61-5.68% Thursday. Initial trades were close to the previous close, before the rate started declining on domestic receiving interest. Dealers said the optimism on rate cuts heard at discussions during the annual conference of the Fixed Income Money Market and Derivatives Association of India and Primary Dealers Association of India at Bali in Indonesia over the weekend led to traders taking bigger bets on the terminal policy repo rate falling below 5.50% in India. 

The Reserve Bank of India's Monetary Policy Committee has cut the policy repo rate by 25 basis points each in the February and April policy reviews to 6.00%, and another 50-bps of rate cuts are already priced into swap rates. Moreover, the overnight Mumbai Interbank Offer Rate--the floating rate of the OIS contract--has been set below the repo rate after the MPC's April rate cut. RBI Governor Sanjay Malhotra had said after the policy outcome that the central bank would ensure a sufficient liquidity surplus in the banking system, which is likely to keep MIBOR fixings below the repo rate going ahead, traders said. 

"The room is being given because MIBOR setting is also sub-repo rate, and the RBI is still in (liquidity) infusion mode," a dealer at a private bank said. "So while 50-bps of (further) repo rate cuts are priced in (for 2025), if your funding costs are going to be below that, then the market is looking at a MIBOR of 5.25% eventually, if not lower." The central bank is scheduled to buy another INR 400 billion of gilts in April, infusing that amount of liquidity into a banking system that already is in surplus.

The one-year contract, which is down 35 bps so far in April, is on track to fall the most in a month since April 2020, while the two- and five-year OIS rates are also on track to have their best months since March 2023 and December 2023, respectively. The five-year swap rate is seen falling to 5.56%, after which traders would unwind received positions at a profit, dealers said. 

Trading volumes picked up in the second half of the day after the most-traded swap rates hit the day's lows after 1330 IST, dealers said. Traders, likely from foreign banks, paid fixed rates as they got orders from life insurers for bond-forward rate agreements. The bond derivative contracts have become more lucrative as the funding cost is tied to OIS rates, which have slumped more than gilt yields, dealers said.

"We got some queries for long-term bonds and at the same time saw paying in swaps," a dealer at a primary dealership said. "The reason we understand for the pickup in volumes and even the paying is probably linked to bond-forward rate agreements."

OUTLOOK

Tuesday, swap rates may take cues from the overnight movement in US Treasury yields. The impact of the offshore trigger may be muted as traders have a high conviction that domestic interest rates are going to fall, dealers said. 

With no major data releases scheduled, traders will closely track the movement in the overnight MIBOR rate for direction on short-term swap rates. Swap rates maturing in three years and above may be sensitive to developments on the impact of the ongoing US-China trade war. 

The one-year swap rate is seen in the range of 5.55-5.75%, and the five-year at 5.63-5.82%.

End

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

Edited by Saji George Titus

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