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Informist, Tuesday, Apr. 22, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates inched up Tuesday due to a rise in US Treasury yields, though the impact was limited due to lack of fresh triggers on interest rates either domestically or offshore, dealers said. Swap rates continue to reflect further repo rate cuts in India at the next monetary policy review in June, and later in 2025.

The one-year swap rate ended at 5.70%, up from 5.69% on Monday, and the five-year swap ended at 5.64%, against 5.63% the previous day. Total trade volumes on the Clearing Corp. of India's derivatives trading platform were down slightly at INR 297.40 billion Tuesday, from INR 308.65 billion the previous day.

The yield on the 10-year US Treasury note rose 8 basis points to 4.41% on Monday, and rose further to 4.44% during Indian market hours Tuesday, as the tiff between US President Donald Trump and Federal Reserve Chair Jerome Powell deepened. Trump again called out Powell for not cutting interest rates, while the central bank chief had in comments last week said the Fed was looking out for the impact of the tariffs that the US has imposed on all major trading partners earlier this month. The tariffs are expected to drive up inflation in the world's largest economy, and investors fear Trump's threat to replace Powell with someone favouring rate cuts in a hurry may lead to an upswing in prices.

"We paid heed to US yields after a long time today, since there was nothing else to keep our attention onshore," a dealer at a primary dealership said. "People have already received a lot on (expectations of) rate cuts, so it was time to take a breather." The one-, two- and five-year swap rates are on track this month to register their biggest monthly falls since at least 2023.

Traders paid fixed rates on account of the rise in US yields only in swaps maturing in two years or more, dealers said. They also unwound their received fixed rate positions on shorter-term contracts, taking profits after the slide in rates so far this month. Swap rates maturing between one- and nine months have fallen at least 22 basis points this month.

Earlier this month, the Reserve Bank of India's Monetary Policy Committee cut the repo rate by 25 bps to 6.00% and softened its policy stance to 'accommodative' from 'neutral', indicating it would either cut rates or maintain status quo going ahead. RBI Governor Sanjay Malhotra also said the central bank would ensure sufficient liquidity in the banking system, which is expected to keep the overnight Mumbai Interbank Offer Rate — the floating leg of the OIS contract – below the repo rate. Traders will gauge the minutes of the April MPC meeting, scheduled for release Wednesday, for further cues on the rate trajectory. 

With no fresh trigger on Tuesday, most contracts traded in a narrow band despite healthy volumes. The most-traded contract, the five-year OIS, had a trading range of 5.63-5.65% through the day, a sharp shift from the 7 bps range on Monday. While the consensus view is that the MPC will cut the repo rate until at least 5.50%, some traders are betting on an even deeper rate cutting cycle, potentially to 5.00%, dealers said.

"It was a dull day, though traders were there in the market," a dealer at a foreign bank said. "I think people were taking stock of what they were holding in swaps. Since the view is unilateral that more rate cuts are coming, people can at most square-off their received positions – nobody is going to pay."

OUTLOOK

On Wednesday, 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 of 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 a range of 5.55-5.75%. The five-year contract is seen within 5.63-5.82%.

End

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

Edited by Ashish Shirke

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