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Informist, Thursday, Jul 25, 2024

By Anupreksha Jain

MUMBAI – Overnight indexed swap rates ended lower today as offshore traders received fixed rates following a fall in short-term US yields after a strong demand for two-year US Treasury notes at the auction, dealers said. Additionally, offshore traders received fixed rates, anticipating a rate cut in the US by September that may translate into a cut in the domestic policy rate by December, dealers said. 

The one-year swap rate ended at 6.68%, against 6.69% on Wednesday. The five-year swap rate ended at 6.22%, compared with 6.25% on the previous trading day.

The odds of a 25-basis-point cut in the interest rate by September in the US have increased to 100% from 96% chance a day ago, according to the CME Fedwatch tool. On the domestic front, the one-year swap rate factors in a 25-bps rate cut in February, dealers said. Moreover, traders are increasingly taking bets that the Monetary Policy Committee could change its policy stance to 'neutral' from 'withdrawal of accommodation' by October and cut the policy repo rate, currently at 6.50%, by December, dealers said.

"Overall short-term yields (US treasury yields) are down, and this has led to a robust receiving momentum in swaps," a dealer at a primary dealership said. "One thing is clear from current levels that there is a good amount of offshore flows, maybe because of increasing bets on rate cuts and a fall in 2-year US yields."

Currently, the two-year swap contract is pricing in a 65-bps cut in the domestic policy rate, dealers said. Moreover, if the US Federal Reserve goes for a rate cut in September for certain, then there is more room for 2-year rates to fall further as India will also begin rate cuts by December, they added. Meanwhile, some traders don't expect any rate cuts before February.

"If in the US, inflation sustains around target 2% with middling growth, their Fed funds rate is expected to be close to 2%," a dealer at a private bank said. "If in India, our inflation is close to 4% target with middling growth, our repo is expected to be close to 5.5%." 

Meanwhile, there is some caution in the market as the Reserve Bank of India Governor Shaktikanta Das reiterated several times that a cut in the US may not necessarily translate into a cut in the domestic policy rate, dealers said. The domestic rate-setting panel would like to see if inflation is sustainably coming down to the target of 4% amid an upside risk in inflation owing to higher food inflation, dealers said. This could have a dampening impact on the hopes of rate cuts back home.

Traders are now awaiting the advance estimate for US Apr-Jun GDP, scheduled to be released after market hours today, while personal income and outlays for June are due on Friday. The personal consumption expenditure, the key inflation figure, is expected to rise 0.1% on a monthly basis, a Reuters poll showed.

OUTLOOK

On Friday, swap rates will take cues from the US GDP advance estimates for Apr-Jun, scheduled to be released at 1800 IST. Traders are likely to remain cautious ahead of the US personal consumption expenditure data for June. The personal consumption expenditure, the key inflation figure, is expected to rise 0.1% on a monthly basis, a Reuters poll showed. 

Swaps are likely to take cues from the US unemployment insurance weekly claims for the week ended Saturday, scheduled at 1800 IST.

Traders expect the receiving momentum to continue as odds of rate cuts in the US have increased to 100% from 96% a day ago. This could lead to a cut in the domestic policy rate by December, 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 6.22-6.42%.

End

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

Edited by Vandana Hingorani

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