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Informist, Tuesday, Apr. 29, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower on Tuesday, propelled by the Reserve Bank of India's announcement of a larger-than-expected calendar of open market operations in May. The additional liquidity is likely to bring down the overnight Mumbai Interbank Offered Rate – the floating leg of the OIS contract – leading traders to receive swap rates across tenures, dealers said.

The one-year swap rate ended at 5.67%, against 5.72% Monday. The five-year swap ended at 5.65%, against 5.69% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform fell to INR 314.05 billion, from INR 189.05 billion Monday.

The RBI on Monday said it would conduct four auctions under its OMO to buy bonds totalling INR 1.25 trillion in May. Traders had expected liquidity infusion through this route to total between INR 500 billion-INR 1 trillion, with banking system liquidity already in surplus. With the central bank's surplus transfer to the government also scheduled in May, the market expects a durable liquidity infusion of around INR 3.75 trillion next month. 

This is likely to drive down money market rates quicker than earlier anticipated. The overnight MIBOR has been set near the policy repo rate of 6.00% for most trading days since the Monetary Policy Committee last cut rates on Apr. 9. Traders said that both the weighted average call rate and the MIBOR could now be anchored near the Standing Deposit Facility rate of 5.75% starting next week, when the first tranche of the OMO auctions is settled and the government's month-end spending reflects in the banking system, dealers said. The rate was set at 5.93% on Tuesday.

"The OMO annoucement does not have a direct demand-supply impact in swaps like it does for gilts," a dealer at a private bank said. "But the intent is clear, and easier liquidity does help with easier swap rates. Payers vanished and some hedges were unwound immediately."

Traders unwound their paid fixed rate bets in the five-year swap they had placed in the last few days to protect their underlying bond holdings, dealers said. The yield on the 10-year benchmark gilt fell by 6 basis points on Tuesday to 6.34%, after climbing 10 bps in the past week due to the continuing rise in tensions both diplomatically and at the border between India and Pakistan. The five-year contract also fell due to a slight fall in the 10-year US Treasury yield to 4.24% at 1700 IST from 4.28% at the close of Indian market hours Monday.

However, the one-year contract was the most traded, between a range of 5.65-5.68%, all below the previous close. Trades in the three- and six-month swaps also rose, as the impact on the MIBOR rate would impact the short-term swaps the most, dealers said. Offshore traders also received the two-year swap rate Tuesday, with aggressive bets on the terminal repo rate in 2025 being below the consensus 5.50% currently priced in by the market.

"We are once again looking at a potential run in the up to two-year bonds," a dealer at a foreign bank said. "Offshore flows will be concentrated in the two-year segment, and that will help one-year and lower tenures to also ease further."

OUTLOOK

On Wednesday, 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 is major military activity between the two countries, dealers said.

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.

Traders will track the movement of the overnight MIBOR for direction on short-term swap rates, with the expectation it would fall to 5.75% from 5.93% on Tuesday. Swaps maturing in three years and above may be sensitive to developments in the US-China trade war and the broader US tariff policy.

The one-year swap rate is seen in a range of 5.55-5.75% on Wednesday. The five-year contract is seen in the 5.63-5.82% range.

End

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

Edited by Tanima Banerjee

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