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Informist, Thursday, Jul 18, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates remained unmoved from the multi-month lows at close as traders held onto the view of a rate cut in the US in the next two months. There were no fresh triggers either on the domestic or global front to change the outlook, dealers said.

The one-year swap rate ended at 6.70%, flat against Tuesday's close. The five-year swap rate ended at 6.28%, unchanged from the previous trading day. The one-year swap rate was at levels last seen in mid-February, while the five-year swap rate traded around levels last seen in March. India's money markets were shut on Wednesday for Muharram.

The six-month swap rate had the highest trade volume in over a month, while the three-month contract had 67.50 bln rupees of notional trade, the most since early March. Short-tenure swap contracts have been in favour as traders jostle to express the near-term rate view, both domestically and in the US. The trade was dominated by offshore flows for the second straight day.

On Tuesday, US Federal Reserve Chair Powell said 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. Recent inflation and labour market data in the US have also suggested interest rates could be cut sooner rather than later. The CME FedWatch tool shows that Fed funds rate traders are near-unanimous in pricing in at least a 25-basis-point rate cut by September.

"A lot of the influence in the US is rubbing off on domestic swaps," a dealer at a foreign bank said. "It is not a good time to be a payer (of fixed rates)."

The domestic rate view now sees substantial bets on a rate cut in December, provided the US does cut rates in September, dealers said. Traders remain optimistic despite comments from RBI officials, including Governor Shaktikanta Das, seeking to de-link the interest rate trajectory in the two economies. In recent public comments, he has reiterated that CPI inflation in India remains well above the central bank's 4% target and the last mile of disinflation looks sticky. India's CPI inflation was higher than expected in June, hitting a four-month high of 5.08% from 4.80% in May.

Meanwhile, swap rates in the five-year segment remained stagnant as US Treasury yields were largely steady. US Treasury yields have largely factored in the accelerated rate cut. However, longer tenure US yields are also factoring in a potential win by Republican challenger and ex-president Donald Trump. The yield on the benchmark 10-year US Treasury note ticked up slightly to 4.19% at the end of Indian market hours today, from 4.17% on Tuesday.

Chances of a Trump win at the US presidential elections in November have increased following a failed assassination attempt on him last weekend. Investors expect that Trump coming to power would mean lower corporate taxes and stricter trade relations. Trump's policies are considered inflationary and pro-growth, leading to higher bond yields.

"Domestic guys have been trying to pay at the current level (in the five-year swap rate), but we are once again entering into a period of euphoria on rate cuts," a dealer at a primary dealership said. "Fortunately, it looks like this time the data is actually backing up the view, rather than large positioning running on gut feeling of a hard landing or a soft landing (for the economy).

OUTLOOK

Swap rates are seen opening steady on Friday amid a lack of domestic and offshore rate cues, dealers said. RBI Governor Shaktikanta Das is scheduled to speak at an event at 1030 IST on Friday, which may be a trigger for 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

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

Edited by Deepshikha Bhardwaj

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