India IRS Review: Down as traders receive fixed rates on rupee rise

Informist, Tuesday, Jan 10, 2023


By Kasthuri Akhil and Aaryan Khanna


MUMBAI – Overnight indexed swap rates ended lower for the second day in a row today as traders unwound their fixed rate bets across tenures, on the view that the US Federal Reserve would temper its pace of monetary policy tightening, dealers said. The fall was helped by the sharp appreciation of the rupee against the dollar.


The one-year swap rate settled at 6.66%, as against 6.70% on Monday. The five-year swap rate ended at 6.34%, against Monday's close of 6.39%.


US labour and manufacturing data releases over the last week pointed to a slowing US economy and easing inflationary pressures, making the case for the Federal Open Market Committee hike rates by less than the 50-basis-point increase in December, dealers said. 


According to data from the CME Group's Fedwatch tool, over three quarters of Fed funds traders expect a 25-bps rate hike at the committee's Feb 2 outcome, against 68% a week ago. The outliers see a 50-bps rate hike. 


Futures data also showed that the Fed funds rate is expected to top out under 5%, in contrast to Fed officials' median outlook of its policy rate at 5.1% at the end of 2023.


Traders took bets that the US Fed would opt to slow rate hikes to only 25 bps, giving the Reserve Bank of India's Monetary Policy Committee room may be able to pause rate hikes at its upcoming policy decision on Feb 8, dealers said. The domestic rate-setting panel has raised the policy repo rate by 225 bps in 2022 to 6.25%. 


"The movement, particularly in the front-end, is because of the unwinding of long-held positions that had been built with a 6.50% or more terminal rate in mind," a dealer at a foreign bank said. "Even so, the front-month contract has become too optimistic for now, it's not even pricing in any rate hike here (in India)."


The one-month swap rate inched up to 6.33%, while the other swap contracts maturing up to nine months fell 2-5 bps today.


In addition, dealers said that some foreign banks received fixed rates in the five-year swap rate to protect their underlying gilt buys in the 10-year government bond.


The five-year swap rate fell more due to the strengthening of the Indian currency against the dollar. The rupee ended at 81.79 per dollar today, its highest closing level since Dec 2. The rupee rose 0.7% against the greenback as state-owned banks persistently sold dollars for foreign portfolio inflows into upcoming primary debt issuances.


"OIS was tracking the US yield movement only initially but that too wasn't much," a dealer at a primary dealership said. "During the day, the rupee strengthening triggered the receiving."


The benchmark 10-year US Treasury yield fell by 7 bps to 3.53% in early trade from the close of Indian market hours on Monday.



On Wednesday, swap rates are seen steady on lack of cues on interest rates, dealers said.


Traders may watch out for any sharp movement in US Treasury yields and crude oil prices at open.


The swap rate in the one-year segment is seen at 6.55-6.75%, and the five-year at 6.25-6.45%.



At 1700 IST


1-year OIS


2-year OIS


5-year OIS


2-year MIFOR


5-year MIFOR





US$1 = 81.79 rupees


Edited by Aditya Sakorkar


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