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Informist, Friday, Jul 19, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady due to a lack of domestic triggers, though traders continued to place bets on easing monetary conditions in the next few months, dealers said. A rise in US Treasury yields overnight led to the five-year swap rate ticking up. 

The one-year swap rate ended at 6.71% against 6.70. The five-year swap rate ended at 6.30% compared with 6.28% the previous trading day.

There were trades on all swap contracts on Clearing Corp of India's Anonymous System for Trading in Rupee OTC Interest Rate Derivatives, or 'ASTROID', platform. These range in tenure from one-month to ten years, a sign that interest rate expectations are currently uncertain and on the cusp of changing, dealers said.

The one-month, three-month, and six-month swap contracts each had trades worth a total 23 bln rupees, or more, today. These were each double the volume traded in the one-year swap rates, considered the benchmark for signalling the near-term rate view. Traders said that while the one-year swap rate now showed a cut in the repo rate between December and February, some traders wanted to bet on overnight rates falling further before an actual rate cut, dealers said.

"These are all flow-based trades, it looks like," a dealer at a foreign bank said. "Somebody has taken a large position on liquidity conditions getting better really quickly, and now either has to hedge or his counterparty has to." 

The Mumbai Interbank Offered Rate, or MIBOR, which is the floating leg of OIS contracts, has been set between 6.55-6.62% in July. The MIBOR rate hovered around the marginal standing facility rate of 6.75% in June, and is now expected to fall below the policy repo rate of 6.50% after the next monetary policy review in August. Reserve Bank of India data shows that banking system liquidity has remained in surplus through July.

Meanwhile, domestic traders paid fixed rates since early in the day, tracking an overnight rise in US Treasury yields. US Federal Open Market Committee voting member Mary Daly said on Thursday that recent inflation readings have been very good, but the US central bank has not achieved price stability yet. The yield on the benchmark 10-year US Treasury note rose slightly to 4.21% at the end of Indian market hours today from 4.19% on Thursday.

Comments from RBI Governor Shaktikanta Das today did not impact expectations on India's interest rate trajectory, dealers said. Das said at an event today that a neutral rate of interest is a theoretical, abstract concept and cannot determine policy in the real world. The neutral, or natural, interest rate is the real rate of interest at which CPI remains constant and economic growth is at its potential.

The most recent discussion on neutral rates comes from the staff paper published by the central bank on Thursday, which said India's natural rate of interest rose to 1.4-1.9% during Jan-Mar from 0.8-1.0% in Oct-Dec 2021. The wide band of the neutral rate can be used to justify any position-–a rate cut or a hold-–favoured by members of the Monetary Policy Committee, dealers said. Moreover, it lends credence to RBI officials' view that there is no immediate need to cut rates, with the real interest rate-–the policy rate net of expected inflation in the current financial year-–working out to be 2.0%, just above the neutral interest rate in Jan-Mar. 

OUTLOOK

Swap rates are not traded on Saturdays. They are seen opening steady on Monday amid a lack of domestic and offshore rate cues, dealers said.

Traders may be cautious ahead of the Union Budget for 2024-25 (Apr-Mar), dealers said. While the event will not have a direct impact on interest rates, swap rates in the two-year segment and above may be influenced by the government's spending pattern and the impact seen on inflation.

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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