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Informist, Monday, Apr. 28, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended largely steady due to lack of significant cues on interest rates. Trading volumes were muted despite a fall in US Treasury yields over the weekend, which led to some traders receiving fixed rates early in the day, dealers said.

The one-year swap rate ended at 5.72%, against 5.73% Friday. The five-year swap ended at 5.68%, against 5.69% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform fell to INR 189.05 billion, from INR 255.50 billion Friday.

Traders said they were already pricing in at least 50 basis points of further repo rate cuts in 2025, an expectation in place since mid-March. Further bets on the terminal repo rate being 5.25% or 5.00% from the current 6.00% had been placed, but unwound over the past two weeks as traders booked profit. Moreover, traders were cautious on ramping up their rate cuts bets in light of the reported border clashes between India and Pakistan over the weekend, with the geopolitical uncertainty potentially slowing the pace of rate cuts by the Reserve Bank of India's Monetary Policy Committee.

A further slide in short-term swap rates could come as the overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--is set significantly below the repo rate, dealers said. Some traders had expected the MIBOR rate to be set nearer the Standing Deposit Facility Rate of 5.75% after the MPC softened its stance to 'accommodative' from 'neutral' on Apr. 9, and the RBI continued with heavy liquidity infusions through open market operations. Even with surplus liquidity throughout April, according to a proxy for measuring banking system liquidity, the overnight MIBOR rate has been set below 5.90% only once, and uniformly at 5.95% over the last three trading days.

"I think market is happy with how it is positioned, so there is not a lot of trading activity," a dealer at a primary dealership said. "The MIBOR is not repricing lower, so unless that falls we are kind of stuck in a range with respect to 1-year swap and all these shorter tenures. Flow, either from offshore or corporate, is the only thing moving the markets."

Meanwhile, the five-year contract saw some two-way activity as offshore traders had received the swap in early trade, dealers said. The yield on the 10-year benchmark US Treasury note hit a low of 4.25% during Indian market hours, compared with 4.31% at the close of India market hours Friday. Even so, the most-traded OIS contract only traded in a narrow band of 5.66-5.69%.

US yields fell as investors hoped for relief in tariff-related disputes between the US and China after reports said that China was considering exempting some US goods from the tariffs levied. Some traders also hoped that the US Federal Reserve would consider lowering policy rates soon to support growth in the world's largest economy. Further US rate cuts may open the room for the MPC to cut the repo rate below 5.50%, dealers said.

OUTLOOK

On Tuesday, swap rates are likely to take cues from geopolitical developments between India and Pakistan, dealers said. Traders will unwind their received fixed-rate bets if there are further instances of firing on the border or major military activity between the two countries, dealers said. However, if a diplomatic solution is found, traders may receive the two-year and five-year swap rates aggressively, pulling them down by up to 5 bps each.

The movement in US Treasury yields may also lend direction to swap rates. The impact of the offshore trigger may be muted as traders are convinced domestic interest rates are going to fall further, particularly after the release last week of the minutes of the Monetary Policy Committee's April meeting, dealers said.

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

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 Akul Nishant Akhoury

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