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Informist, Wednesday, May 21, 2025

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower Wednesday, tracking a fall in Indian government bond yields, dealers said. Rates across tenures fell despite a rise in US Treasury yields as bets of more than two rate cuts by the Reserve Bank of India's Monetary Policy Committee in 2025 gained traction, they said.  

The one-year swap rate ended at 5.56%, down from 5.60% Tuesday. The five-year swap ended at 5.63%, lower than 5.68% the previous day. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 162.38 billion, higher than INR 151.50 billion Tuesday.

"Today's (Wednesday's) fall looks to be a reaction to bonds," a dealer at a private sector bank said. "I don't think offshore traders are comfortable receiving these levels, so mostly looks like banks and other domestic traders are on the receiving side."

The yield on the 10-year benchmark US Treasury note rose overnight to 4.51% before 0900 IST and further to 4.54% at 1700 IST from 4.46% at the time of Indian market close on Tuesday. This led to swap rates opening higher on Wednesday. Both onshore and offshore traders paid fixed rates on the five-year swap in early trade. However, a fall in domestic bond yields led traders to receive fixed rates, which led swaps to reverse early gains, dealers said. 

Traders speculated that the RBI would revise the existing liquidity management framework to enhance the liquidity surplus in the banking system. These expectations boosted gilt prices, which in turn led traders to receive bets in OIS, dealers said. RBI officials likely met some bank executives on Wednesday to discuss the liquidity management framework. Traders also expect a record-high surplus transfer by the RBI to the government, which is expected to be announced on Friday. 

The benchmark 10-year 6.79%, 2034 gilt yield fell 2 basis points Wednesday to 6.24%, falling below the key 6.25% level.

Domestic traders received fixed rates later in the day to cover their paid positions taken in early trade, dealers said. Corporate houses also received fixed rates in the five-year swap to hedge their bond issuance, they said. 

Meanwhile, expectations of more than two policy rate cuts by the RBI's Monetary Policy Committee during the year also gained traction, which deterred a rise in rates, dealers said. Many traders also expect India's GDP growth for Jan-Mar to be lower than 6.2%, while some economists estimate the print at 6.8%. The data will be released on May 30.

"There was so much receiving interest today (Wednesday) despite US yields being up. This was because expectations of a further ease in liquidity and rate cut bets ran wild in the market, and the sentiment was triggered due to (a rise in) bond prices," a dealer at another private sector bank said. "But it shouldn't go below 5.60% (on the five-year OIS rate) from here without US yields falling."

OUTLOOK

On Thursday, rates are likely to track the movement of US Treasury yields after comments from US Federal Reserve officials, dealers said. Traders may also take cues from news on the outcome of the RBI's meeting with bank officials Wednesday. 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 the central bank's board meeting, 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 to INR 4 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% Thursday. The five-year contract is also seen in the 5.50-5.84% range.

End

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

Edited by Saji George Titus

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