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Informist, Friday, May 16, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended slightly lower following an overnight fall in US Treasury yields, largely reversing the slight rise Thursday. Volumes in the one-month swap rate surged, while those on other tenures ebbed due to a lack of cues on domestic interest rates, dealers said.

The one-year swap rate ended at 5.62%, against 5.63% Thursday. The five-year swap ended at 5.66%, down from 5.68% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 477.55 billion, lower than INR 524.70 billion Thursday.

By far the most traded swap rate Friday, the one-month swap ended 1 basis point lower at 5.84%, at which all deals were transacted. The notional traded volume on the contract rose to INR 113.00 billion, its highest since Mar. 28. Traders gave diverging reasons for the increase in volume, with some speculating it was a series of bets by a large trading house on a 50-basis-point rate cut at the upcoming monetary policy review in June. Others said it was likely a hedge on debt instruments by a corporate house. 

"The action in the one-month is a corporate hedging flow or something like that from a large investor. All the trades were large chunks, so it is difficult to know who the counterparties were," a dealer at a primary dealership said. Except for an INR 2-billion trade early in the day, the bulk of the volumes in the one-month swap piled up through deals of sizes between INR 10 billion and INR 35 billion.

The Reserve Bank of India's Monetary Policy Committee is widely expected to cut rates by 25 bps each in June and August, which have been priced into swap rates. Some traders are receiving fixed rates betting on a terminal repo rate below 5.50%, should inflation stay benign and growth print around 6% for the financial year 2024-25 (Apr-Mar), with data scheduled on May 30. The government's advance estimate for GDP growth in FY25 is 6.5%.

Offshore flows were prevalent in swaps maturing between two and five years, which fell the most Friday tracking US yields. The yield on the 10-year US Treasury note fell to 4.42% at 1700 IST from 4.51% at the end of Indian market hours. The slew of US economic data scheduled after Indian market hours Thursday painted a mixed picture of the world's largest economy. However, US yields took cues from the miss in producer price inflation to (-)0.5% on month in April, against a consensus Wall Street Journal estimate of 0.2%.

"Offshore guys were paying yesterday, but are now on the receiving side," a dealer at a private bank said. "Even when the next time US yields go up, I don't think the 10-year (US yield) will go beyond 4.60%."

OUTLOOK

Swaps are not traded Saturday. Monday, rates are likely to track the movement in US Treasury yields, dealers said. The next significant cue on domestic interest rates would be the release of GDP data for Jan-Mar and FY25 on May 30, they said.

Traders also await the RBI's surplus transfer to the central government, which is likely to be announced after a meeting of the central bank's board, likely May 23. Traders estimate the dividend to be around INR 3 trillion, which will add durable liquidity to the banking system. If the transfer is in line with or above the estimate, it could pull swap rates down, dealers said.

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

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