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Informist, Monday, Jul 15, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady as the domestic rate view remained unchanged that the Reserve Bank of India would keep interest rates on hold in the current financial year ending March. A lack of aggressive pricing allowed the market to remain unfazed about India's June CPI inflation, which printed above 5% for the first time in four months.

The one-year swap rate ended at 6.74%, unchanged from Friday's close. The five-year swap rate ended at 6.36%, flat against the previous trading day.

India's CPI inflation rose to 5.08% in June from 4.80% in May, and was above the median expectation of 4.80% in an Informist poll. Data released after market hours on Friday showed that consumer inflation was propelled by high food prices, despite the favourable statistical effect of a high base. Traders had been cautious before the print and paid fixed rates on Friday, and avoided carrying large bets in the event, dealers said.

On the other hand, some traders continued to hold the view that domestic interest rates could begin falling later in 2024. The premise of this view was the RBI's Monetary Policy Committee would be under pressure to follow the US in rate cuts, especially if the Federal Open Market Committee cuts rates in September as is widely expected.

Bets on interest rate cuts have also been conservative as traders are unsure on what level of overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – to bet on. So far in July, the benchmark rate has been set between 6.55% and 6.62% amid a liquidity surplus. Between October and April, the MIBOR rate hovered around 6.75%. Sporadically, the overnight MIBOR rate still drifts up to 6.75%, the upper end of the policy corridor.

Currently, swap rates maturing up to 1-year reflect a 25-basis-point rate cut in June next year, dealers said. Traders are betting on monetary conditions easing, through additional liquidity, rather than an outright repo rate cut by the RBI's rate-setting panel. The overnight MIBOR rate is seen below the repo rate of 6.50% in both six and nine months.

"I don't hold to the same view as others, who are still talking about an October or December rate cut," a dealer at a foreign bank said. "India could delay its rate cuts even if the US Fed begins cutting rates in September."

The CME FedWatch Tool showed that rate cut expectations in the US remained largely unchanged from Friday, with Fed funds rate traders pricing in a 95% chance of at least a 25-basis-point rate cut by September. Regardless, the yield on the benchmark 10-year US Treasury note rose to 4.22% from 4.18% at settlement on Friday.

The intraday rise in US Treasury yields did not have much impact on swap rates as the reason was seen as more relevant to the US fiscal situation instead of an interest rate view, dealers said. Moreover, the view of a US rate cut in September was not rattled by a higher-than-expected US producer price inflation for June. The US producer price index rose 0.2% sequentially in June, against a 0.1% rise expected.

Reports suggested chances of Republican challenger Donald Trump winning the presidential election rose after an assassination attempt on Saturday left him injured. Globally, investors believe that Trump coming to power would mean lower corporate taxes and stricter trade relations, leading to higher bond yields. Trump's policies are considered inflationary and pro-growth.

"There were no real flows attached to the rise in US yields, so broadly the market ignored it," a dealer at a primary dealership said. "It has been a cracking weekend in the US. I don't know if even they have any idea how the election will pan out in the next four months."

OUTLOOK

Swap rates are seen opening steady on Tuesday amid a lack of domestic rate cues, dealers said. Comments by US Federal Reserve Chair Jerome Powell later today may lend direction to the US interest rate view.

Any sharp movement in US Treasury yields and crude oil prices may also lend cues at the opening. The swap rate in the one-year segment is seen at 6.65-6.80% and in the five-year segment at 6.27-6.42%.

End

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

Edited by Vidhi Verma

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