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Informist, Tuesday, Jul 16, 2024

By M.C. Adhiinthran

MUMBAI – Overnight indexed swap rates ended at multi-month lows today as offshore traders received fixed rates after recent comments by US Federal Reserve Chair Jerome Powell firmed bets on a rate cut by September in the world's largest economy, dealers said. The one-year swap rate ended at 6.70%, the lowest since Feb 12, against 6.74% on Monday. The five-year swap rate ended at 6.28%, the lowest since Mar 12, against 6.36% the previous trading day. Trade volume in the five-year contract was the most in over a month.

"It's funny how foreign traders are reacting in Indian markets when US yields did not move all that much," a dealer at a primary dealership said. The yield on the 10-year benchmark US Treasury note fell to 4.18%, from 4.23% at the time the Indian market closed on Monday. 

Foreign investors reacted to US Fed Chair Powell's comments at an event in Washington DC that the central bank will not wait until inflation hits 2% to cut interest rates. Powell indicated that the central bank is looking for "greater confidence" that inflation will drop to the 2% level, citing "long and variable lags" in policy effects.

This comes after last week's US inflation data, which saw an unexpected decline in CPI, while the Producer Price Index came in hotter than expected. The CPI fell 0.1% in June from May and was 3% higher on an annual basis. Wholesale prices climbed 0.2% in June from the previous month, above the forecast 0.1% rise.

"The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you're doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%," Powell said.

According to the CME FedWatch Tool, Fed Funds Futures traders now see a 100% chance of a US rate cut by September, against 73.2% a week ago.

In an analysis report today, Moody's Ratings said they see room for the US Federal Open Market Committee to cut interest rates by 25 basis points in July, with 50-75 bps of rate cuts in 2024 and 100-125 bps of cuts in 2025. Currently, the Federal Funds rate are at 5.20-5.25%.  

Subsequently, bets on a rate cut in India by December firmed, dealers said. The one-year swap rate, which is used as the gauge the market's expectations of the rate trajectory, fell to 6.70%, signifying a 25-basis-point rate cut by December.

The Mumbai Interbank Offered Rate, or MIBOR, which is the floating leg of OIS contracts, hovered around the repo rate of 6.50% since the start of the month. The MIBOR rate hovered around the marginal standing facility rate of 6.75% in the previous month. 

"Rate cuts in India were expected to happen in December or February," a dealer at a private bank said. "These are good rates to receive when expecting rate cuts, so the market is doing just that." 

The market expected the Monetary Policy Committee to change its stance to "neutral" from "withdrawal of accomodation" in the coming meeting in August. The recent domestic CPI inflation data erased all hopes for change in stance in August, dealers said. India CPI inflation for June was at 5.08%, against 4.8% in May. Now, the market largely expects a stance change and a rate cut in the December meeting, provided the US Fed cuts rates by September. Some also expect rate cuts by Jan-Mar. 

OUTLOOK

Money markets will remain shut on Wednesday on account of Muharram. Swap rates are seen opening steady on Thursday amid a lack of domestic rate cues, dealers said. The market may take cues from US data like the monthly sales for retail and food services for June and import and export price indices for June. Both data points are due post market hours today. 

Dow Jones expects overall sales to fall 0.4% on-month, against a rise of 0.1% in the previous month. Import prices are seen falling 0.2%, against a 0.4% fall in the previous reading. Moreover, US Fed Christopher Waller is set to speak on Wednesday, which may lend cues to swap rates.  

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

Edited by Deepshikha Bhardwaj

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