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Informist, Tuesday, Jul 23, 2024

By Anupreksha Jain

MUMBAI – Overnight indexed swap rates ended lower as offshore traders received fixed rates on the announcement of a downward revision in the fiscal deficit target to 4.9% of GDP for 2024-25 (Apr-Mar), dealers said. This led to confidence amongst offshore traders that the government is on the path of fiscal consolidation.  

The one-year swap rate ended at 6.72% against 6.73% on Monday. The five-year swap rate ended at 6.28% compared with 6.32% the previous trading day.

"It shows that the government is adamant on reducing its fiscal deficit in due course of time," a dealer at a primary dealership said. "Therefore, it gives a strong picture to offshore traders that there will be no fiscal splurge on the government side."

The Budget lowered the fiscal deficit target for the current financial year to 4.9% of GDP from 5.1% in the Interim Budget. The fiscal deficit in 2023-24 was 20 basis points lower than the revised estimate of 5.8% of GDP. The fiscal deficit of 4.9% for 2024-25 is below the consensus estimate. According to an Informist poll, the fiscal deficit was seen at 5.0% of GDP for this year.

The government in 2021 laid out a fiscal roadmap, under which it has to lower the fiscal deficit to below 4.5% of GDP by 2025-26. Finance Minister Nirmala Sitharaman said that the government is committed to staying on the course. From 2026-27 onwards, the government will endeavour to keep the fiscal deficit each year such that the Centre's debt will be on a declining path as a percent of GDP, she said.

"See, the lowering of fiscal deficit will make a stronger case for India in order to get its global rating upgraded," a dealer at another primary dealership said. 

Further, traders continued to bet on easier monetary conditions in India's economy, helped by a liquidity surplus that has remained comfortable throughout July. 

The market now looks forward to offshore cues for further direction, dealers said. The Federal Open Market Committee's meeting, which is scheduled towards the end of the month, may lend some cues regarding rate cuts in the US. This may give some clarity over rate cuts back home, dealers said.

Even if the US rate-setting panel keeps rates unchanged at 5.25-5.50% at the upcoming meeting, cuts would happen in September, dealers said. In such a scenario, rate cuts in India would begin in October, they added.

OUTLOOK

Swap rates are seen opening steady on lack of firm domestic cues. The market will watch out for key economic data from the US for further guidance on rate cuts in the US. The market will assess the US GPD advance estimates for Apr-Jun, scheduled to be released on Thursday. Further, swaps may take cues from the US Johnson Redbook Retail Sales Index, scheduled at 1825 IST. Swaps are likely to take cues from the speech of various US Federal Reserve officials, who are scheduled to speak later this week.

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 Namrata Rao

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