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Informist, Tuesday, Jul 30, 2024

By Nishat Anjum

MUMBAI – Overnight indexed swap rates ended steady today as traders avoided aggressive bets on caution ahead of the outcome of the US Federal Open Market Committee's policy meeting, dealers said. Some traders also unwound their received bets at a profit, they added.

The one-year swap rate ended at 6.69%, against 6.68% on Monday. The five-year swap rate ended at 6.26%, compared with 6.24% on the previous trading day.

At the end of the two-day meeting on Wednesday, the US rate-setting panel is largely expected to keep rates unchanged at 5.25-5.50%. According to the CME FedWatch Tool, Fed fund futures show a 95.9% chance of rates remaining unchanged at the meeting. Traders will look forward to the comments of Fed Chair Jerome Powell, which may give insight into the trajectory of interest rates in the world's largest economy, dealers said.

When it comes to the rate cuts, the bets are on the September policy meeting, dealers said. Currently, Fed fund futures traders have priced in 100% certainty of rate cuts by September in the US. The US Job Openings and Labor Turnover Survey data for June, due later today, would also provide cues to investors about rate cut possibilities in the US.

"Their (US) data has been quite positive and even officials there have hinted at an ease (in interest rates) soon," a dealer at a primary dealership said. "After that, to maintain some interest rate differential, we (the Reserve Bank of India) will also cut by year-end."

If there is a rate cut in the US by September, then the chances of the RBI's Monetary Policy Committee opting for a rate cut by December or February increase significantly, dealers said. They said that prior to cutting rates, the domestic rate-setting panel may change the policy stance to 'neutral' from 'withdrawal of accommodation'.

Currently, the one-year swap contract factors in a 25 basis points rate cut by the RBI only in February, dealers said. The floating leg of the OIS contract, which is the overnight Mumbai Interbank Offered Rate, has been hovering around the repo rate of 6.50% for most of this month, as against 6.75% in June, they added. Today, overnight MIBOR was pegged at 6.55%.

Moreover, reversing the trend from last week, traders unwound their received bets at a profit, dealers said. This led to slight paying momentum in the long-term swap rates, dealers said. However, lack of any fresh cues on the interest rate front added to the lacklustre movement in the market, they added.

"There seems to be receiving resistance at current levels. For rates to fall below the current levels, the market would need a stronger cue," a dealer at a private bank said. "Right now, these are good levels to pay."

OUTLOOK

On Wednesday, swap rates may open steady as traders are likely to maintain caution ahead of the US FOMC meeting outcome, due at 2330 IST, dealers said.

Traders are also waiting for Bank of Japan's policy outcome on Wednesday, which may see the central bank increase interest rates, dealers said. Economists polled by Reuters expect the Japanese central bank to increase its benchmark interest rate to 0.1% from the current range of 0.0-0.1%.

Bank of England is also set to detail its policy review on Thursday. The central bank's first interest rate cut since 2020 hangs in the balance amid increased uncertainty, as key policymakers have not spoken publicly for more than two months due to rules in the run-up to the general election.

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 6.60-6.80% and in the five-year segment at 6.20-6.35%.

End

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

Edited by Ashish Shirke

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