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Informist, Tuesday, May 20, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower Tuesday tracking an overnight fall in US Treasury yields, dealers said. Firm hope of further rate cuts by the Reserve Bank of India's Monetary Policy Committee, along with aggressive positioning on expectations of a low GDP growth print for Jan-Mar also led to a fall in swap rates, they said.

The one-year swap rate ended at 5.60%, down from 5.63% Monday. The five-year swap ended at 5.68%, lower than 5.71% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 151.50 billion, lower than INR 382.10 billion Monday.

"Today (Tuesday) there are good number of offshore flows because UST (yield on the 10-year US Treasury note) has come down below 4.50%," a dealer at a private sector bank said. "FPIs (foreign portfolio investors) who don't want to buy gilts aggressively are receiving swaps instead."

The yield on the 10-year benchmark US note fell to 4.46% at 1700 IST from 4.56% at the same time Monday. The fall was due to attractive yield levels for institutional investors, even as traders fear that the yield could rise back above 4.50%, with some fearing the yield will touch the key 4.80% level because of the uncertain economic outlook and ballooning fiscal debt in the world's largest economy, dealers said.

Despite persistent fears about US yields, offshore traders received fixed rates on the two- and five-year swaps due to the overnight fall in yields. A state-owned power-sector lender also received fixed rates in the five-year swap to hedge its bond issuance, dealers said. 

Meanwhile, expectation of more than two policy rate cuts by the RBI's rate-setting panel during the year also gained momentum. Many traders expect India's GDP growth for Jan-Mar to be around 6.2%, while some economists' estimate 6.8%. The data will be released May 30. Traders are also expecting the RBI to transfer a record-high surplus to the government, to the tune of INR 3 trillion to INR 4 trillion, which will eventually translate to greater liquidity in the banking system. 

"Though the RBI dividend will not have an instant impact on overnight rates, they will definitely fall," a dealer at another private sector bank said. "Moreover, domestic sentiments are positive and these are good levels to receive if you are seeing more rate cuts in the horizon."

OUTLOOK

On Wednesday, rates are likely to track the movement of US Treasury yields after comments from US Federal Reserve officials, dealers said. The next significant cue on domestic interest rates would be the release of GDP data for Jan-Mar and 2024-25 (Apr-Mar) 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 on Friday. Traders estimate a bumper surplus transfer, which will add durable liquidity to the banking system. If the transfer is in line with or above the estimate of around INR 3 trillion, 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% Wednesday. The five-year contract is also seen in the 5.50-5.84% range.

End

Edited by Akul Nishant Akhoury

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