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Informist, Tuesday, May 13, 2025

By Cassandra Carvalho 

MUMBAI – Overnight indexed swap rates ended steady Tuesday as offshore investors paid fixed rates tracking a rise in US Treasury yields over the long weekend. This offset a fall in rates earlier in the day after India and Pakistan agreed to end hostilities, dealers said.

The one-year swap rate ended at 5.64%, little changed from 5.63% Friday. The five-year swap ended at 5.65%, also little changed from 5.66% Friday. Money markets were shut Monday for Buddha Purnima. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 623.30 billion, higher than INR 478.25 billion Friday.

Swap rates opened lower as fears of rising tensions between India and Pakistan subsided as the two countries reached an understanding and halted military action against each other. After a terrorist attack which killed 26 people in Pahalgam, tensions between India and Pakistan rose to the highest level since the Kargil war. The cessation of hostilities eased concerns of a full-blown war, which led domestic traders to receive fixed rates, dealers said.

"I think 5.70% is a good level to receive on the 5-year swap if we're going to see at least two more cuts in the repo rate," a dealer at a state-owned bank said. "Swaps (5-year OIS) have still only priced in 52-53 bps of cuts, it can go to 100 bps."  

However, some offshore investors paid fixed rates later in the day due to a rise in US yields. The yield on the benchmark 10-year US Treasury note rose to 4.45% at 1700 IST, from 4.39% at the same time Friday. US yields rose as demand for safe haven assets was dampened after US and China agreed to suspend most of the tariffs on goods imported from one another for 90 days effective Wednesday. The US-China trade deal also boosted appetite for Chinese assets, drawing foreign portfolio investors away from Indian markets, dealers said.

Mutual funds likely received fixed rates for their asset and liability management in swaps of six to 12 months, dealers said. Traders took advantage of spreads between swap rates, such as between the two-year and five-year rates. The spread between the two swaps was 13 basis points Tuesday, up from 11 bps a month ago. Additionally, the spread between the five-year 6.75%, 2029 gilt and the five-year swap rate widened to 36 bps, and is expected to widen further to 55-60 bps. This was ideal for reverse bond swaps, dealers said.

Swap rates were little changed after India's CPI inflation for April fell to a 69-month low of 3.16%, data released by the statistics ministry Tuesday showed. The figure was largely in line with traders' expectations of 3.2%, according to an Informist poll.

"I think the inflation narrative is pushed fairly into the background, people are just paying now as they're spooked because of US yields," a dealer at a private sector bank said. "The 10-year US yield could go back to its 4.70-4.80% levels. FPIs won't be receiving much now, at least until we're closer to dividend or a rate cut (by the RBI's Monetary Policy Committee in June)."

OUTLOOK

On Wednesday, swap rates will likely track US yields, dealers said. Traders also await the RBI's payment of its annual dividend to the central government, due this month. Traders estimate the dividend to be INR 2 trillion to INR 3 trillion, which will support liquidity in the banking system. If in line with or above the estimates, the dividend transfer could pull swap rates down, dealers said.

Traders will also track the movement of overnight Mumbai Interbank Offer Rate for direction on short-term swap rates. The one-year swap rate is seen in a range of 5.50-5.75% Wednesday. The five-year contract is also seen in the 5.50-5.75% range.

End

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

Edited by Ashish Shirke

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