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Informist, Monday, Jul 22, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady. Trade was propelled by a variety of offshore cues from the US and China, even as it did not lend direction to swap rates. Traders avoided aggressive bets on caution ahead of the Union Budget for 2024-25 (Apr-Mar) on Tuesday, dealers said.

The one-year swap rate ended at 6.73% against 6.71% on Friday. The five-year swap rate ended at 6.32% compared with 6.30% the previous trading day.

US President Joe Biden withdrew from the 2024 US Presidential election and endorsed Vice-President Kamala Harris as the Democratic Party's new presidential candidate, he said in a letter posted on social media platform X, formerly Twitter, late on Sunday. The decision comes after weeks of concern about the president's age, mental acuity, and ability to win in the US Presidential Election in November, following a poor performance against Republican Party candidate and former president Donald Trump in a presidential debate last month.

"All markets are a little bit jittery before the Budget. There's no clarity on the political aspect also, with Biden dropping out of the US election," a dealer at a primary dealership said.

There was no clear-cut impact on global bond and equity markets on the change in the potential US president for domestic swap rates to take cues, though offshore traders preferred to pay fixed rates, dealers said. The yield on the benchmark 10-year US Treasury note traded at 4.20-4.24% during Indian market hours today.

Separately, the People's Bank of China surprised markets today by cutting its benchmark lending rates to spur a sluggish economy. The one-year loan prime rate, five-year loan prime rate, and seven-day reverse repo rate were reduced by 10 basis points each. With this, the short-term rate is now 1.7%, the one-year rate 3.35%, and the five-year rate 3.85%, the central bank's website showed.

"While the China rate cut may have had an impact for individual traders, I don't think it had a market-wide impact," a dealer at a foreign bank said. "The market was more or less closely tracking the 4-bps move in US yields, and there was paying (of fixed rates) from offshore."

On the domestic rate front, dealers continued to bet on easier monetary conditions in India's economy, helped by a liquidity surplus that has remained comfortable throughout July. However, some traders were spooked about the Reserve Bank of India taking more aggressive actions to curtail liquidity in the coming months.

RBI data on Friday showed the central bank sold 34.05 bln rupees of gilts in the secondary market in the week ended Jul 12, a first in eight months. After the monetary policy meeting held in October, RBI Governor Shaktikanta Das had said the central bank might explore open market operation sales to manage liquidity in the banking system. In an interview with CNBC-TV18 on Jul 11, he reiterated that it remains a tool to tackle excess liquidity.

The Mumbai Interbank Offered Rate, or MIBOR, which is the floating leg of OIS contracts, has been set between 6.55% and 6.62% previously in July but rose to 6.69% today. 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. If overnight rates do not fall quickly, the one-year swap rate could drift up by another 3-4 bps, dealers said.

While India's Budget 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. After the Bharatiya Janata Party lost its outright majority in the Lok Sabha elections this year, the government is seen increasing its spending, which could be inflationary and reduce the quantum of rate cuts in 2025, dealers said. 

OUTLOOK

Swap rates are seen opening steady on Tuesday before the presentation of the Union Budget for 2024-25 at 1100 IST. The Budget may lend cues on the inflation outlook, but is otherwise not seen as a major factor for swap rates, dealers said.

With the gross borrowing expected to be cut in the Budget, traders have received fixed rates heading into the event. An adverse surprise on the borrowing may lead to a spike in OIS rates, dealers said.

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 Akul Nishant Akhoury

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