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Informist, Thursday, Jun. 5, 2025

By Srijita Bose

MUMBAI – The five-year overnight indexed swap rate ended lower Thursday due to an overnight fall in US Treasury yields, dealers said. However, caution ahead of the Reserve Bank of India's Monetary Policy Committee outcome on Friday limited the fall, with the one-year swap ending nearly steady, they said. 

The one-year swap rate ended at 5.53%, against 5.54% on Wednesday. The five-year swap rate ended at 5.60%, down from 5.64% on Wednesday. The total notional trade volume on the Clearing Corp. of India's derivatives trading platform was INR 616.80 billion, sharply up from INR 381.90 billion Wednesday. 

The yield on the 10-year benchmark US Treasury note fell 10 basis points to 4.37% from 4.47% at the close of the Indian market Wednesday. The US Treasury yields fell on account of weaker-than-expected jobs data, which led US President Donald Trump to urge the US Federal Reserve to lower interest rates. 

The ADP National Employment Report, published Wednesday, showed US private payrolls rose by only 37,000 in May, after a downwardly revised rise of 60,000 in April. Economists in a Dow Jones poll had estimated employment to rise by 110,000. The non-manufacturing Purchasing Managers' Index fell to 49.9 in May from 51.6 in April, further fuelling fears of a slowdown in the world's largest economy. 

Offshore traders received fixed rates on swaps while also buying Indian government bonds in light volumes, dealers said. Some corporate houses also likely received fixed rates as they positioned themselves ahead of Friday's monetary policy decision, they said. "There were some offshore flows today (Thursday), and also I think foreign banks were also positioning for Friday (MPC outcome)," a dealer at a primary dealership said. "Some corporate guys may also have been there... but the trigger was US yields, of course."

Traders have already positioned for a 25-basis-point cut in repo rate on Friday, dealers said. Some traders even speculate that the MPC could cut rates by 50 bps, despite the strong GDP print for Jan-Mar. SBI Research, in a note, advocated for a 50 bps cut in the repo rate.

Volumes in short-term swaps of up to one year rose sharply to INR 450.80 billion on Thursday from INR 262.65 billion on Wednesday. Short-term swap rates reflect a terminal repo rate of 5.50%, with slight chances of further rate cuts beyond that due to the higher-than-expected GDP growth in Jan-Mar, dealers said. India's GDP growth for Jan-Mar rose to a four-quarter high of 7.4%, sharply higher than the consensus estimate of 6.8%.

"There were some last-minute positioning before policy tomorrow (Friday)... and most of these trades were in shorter end because of the lower exposure," a dealer at a private sector bank said. "Overall, there are so many wide expectations that people don't want to go underinvested into the event."

Traders await RBI Governor Sanjay Malhotra's policy statement to gauge the rate cut trajectory and commentary on liquidity, dealers said. Traders speculate that the central bank's focus could be on liquidity, with some traders now expecting that the central bank will widen the Liquidity Adjustment Facility corridor by reducing the Standing Deposit Facility rate by an additional 25 bps.  

OUTLOOK

On Friday, swaps may open steady ahead of the outcome of the MPC meeting, dealers said. Traders await the RBI governor's comments on growth, inflation, rate-cut trajectory, and liquidity on Friday.

A repo rate cut of 25 bps is priced into swap rates currently. If the committee cuts the repo rate by a larger-than-expected quantum, swap rates may slide Friday. If the MPC holds pat on the repo rate, the entire OIS curve could shift upwards by 10 bps or more, dealers said.

The overnight movement of US Treasury yields may lend direction after the release of economic data in the US and comments from US Federal Reserve officials. If the yield on the 10-year benchmark US Treasury note rises to the key 4.50% level, the five-year swap rate could move closer to 5.70%. 

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 5.48-5.70% Friday. The five-year contract is seen at 5.51-5.75%.

End

Edited by Saji George Titus

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