More Stories

Informist, Monday, Aug 5, 2024

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates slumped today and hit over 14-month lows on firming expectations of a domestic rate cut in 2024-25 (Apr-Mar), dealers said. This was prompted by signs of the US economy faltering, with consensus building of a 50-basis-point rate cut in the US in September. 

The one-year swap rate ended at 6.52%, against 6.62% on Friday. The five-year swap rate ended at 6.09%, compared with 6.15% on the previous trading day. The one-year swap rate fell to as low as 6.48% today, the lowest since May 22 last year, down nearly 35 basis points from highs in July. The 2-year swap rate fell to 6.17%, also the lowest since May 2023.

US rate expectations have shifted dramatically after government data on Friday showed the unemployment rate rose to a near-three year high of 4.3% in July, bringing fears of a recession or "hard-landing" back to the fore. Wall Street strategists, including those from Citibank and JP Morgan, have called for 125 basis points of rate cuts in the remainder of 2024, against 50-bps priced in before the data. In India, no such pressures exist, traders said.

Offshore traders received fixed rates today, while domestic traders paid fixed rates ahead of the three-day meeting of the Monetary Policy Committee that begins Tuesday. Some stop-losses were hit by domestic traders earlier in the day as the 5-year swap fell below 6.08%, which pushed the swap to a June 2023 low of 6.03%, dealers said.

The RBI may be comfortable maintaining the overnight rate consistently at 6.50%, and the MPC may find the slowing global economy compelling enough to soften its "withdrawal of accommodation" stance to "neutral" when its three-day policy review starts Tuesday. But a rate cut may still be two quarters away, considering India's macroeconomic data does not suggest an imminent domestic slowdown, dealers said.

Rates were factoring in easier liquidity and lower overnight rates, rather than the Reserve Bank of India's rate-setting embarking on extensive rate cuts. Still, traders were certain that the RBI would cut rates in the current financial year ending March, and swap rates of the six-month tenure and above were pricing in at least a 25-basis-point rate cut. The policy repo rate has been 6.50% since February 2023.

"It (the one-year OIS rate) is still showing half a rate cut in Jan-Mar, and then half in Apr-Jun," a dealer at a primary dealership said, talking of the 1-year OIS around 6.53%. "Calculating on the lower fixings have anyway taken out 25 bps from the 1-year swap rate over the last few weeks."

India's overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--has consistently been set around 6.55% since the beginning of July, topping 6.75% only twice during the month. The RBI had effected a shadow rate hike for most of Oct-Mar last year, when overnight rates were consistently around 6.75%, the upper end of the policy corridor. While overnight rates have been easing since the financial year started in April, banking liquidity surpluses have consistently been over 1 trln rupees only since Jul 4, aided by the government's spending after polls.

The incremental impact of a stance change may be limited as, at the day's lows on swap rates, most of the impact was already priced in, rates traders said. Cutting interest rates in October is also unlikely, following RBI Governor Shaktikanta Das' comments through July that such discussions are premature. Arguments for rate cuts also fall apart against the Indian central bank's insistence on an independent monetary policy from the US Fed, and inflation not seen consistently at the 4% target until the end of 2025-26, dealers said.

"A December rate cut will be fully priced in when the 1-year swap hits 6.45%, and with the 5-year OIS at 6.05%," a trading head at a private bank said. "I think traders are waiting for a stance change, which is likely to come (on Thursday)."

A sharp fall from here could be seen in the two- and three-year OIS rates, dealers said. The two-year swap rate may fall to 6.00% if the market moves away from its consensus view of a shallow 50-75 bps rate cut cycle in India, they said. For example, if there is a global growth slowdown and the US Federal Reserve cuts rates by 250-bps or more by December 2025, then India's rate-setting panel may also slash the repo rate by as much as 100 bps to 5.50%.

OUTLOOK

On Tuesday, swap rates may open steady ahead of the outcome of the three-day Monetary Policy Committee meeting ending Thursday. Increasingly, traders are betting on a stance change at the upcoming meeting to "neutral" from withdrawal of accommodation". The repo rate is expected to be maintained at 6.50%.

Possible measures by overseas regulators to the stock market crashes since Friday are also awaited in the next few days, dealers said. US services PMI for July, scheduled at 1915 IST, may also lend cues for the US rate trajectory as recessionary fears take hold in the world's largest economy.

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 6.55-6.80% and in the five-year segment at 6.15-6.30%.

End

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

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.