More Stories

Informist, Tuesday, Aug 6, 2024

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended on a mixed note. The five-year swap rate rose, tracking an overnight increase in US Treasury yields, dealers said. Short-term swap rates were little changed as traders maintained their hope the Monetary Policy Committee would change its stance to "neutral" from "withdrawal of accommodation".

The one-year swap rate ended at 6.52%, flat against Monday's close. The five-year swap rate ended at 6.12%, compared with 6.09% on the previous trading day. The swap rates had hit their lowest closing levels in 14 months on Monday.

Expectations of aggressive US interest rate cuts receded as data and comments suggested a recession in the world's largest economy was not imminent. Chicago Federal Reserve President Austan Goolsbee on Monday said that jobs data for July did not indicate a recession, while noting that Fed policymakers must carefully monitor changes in the US economy to avoid being too restrictive with interest rates. The US unemployment rate rose to a near three-year high of 4.3% in July from 4.1% in June, raising fears of a recession.

The latest Purchasing Managers' Index data reduced fears of an imminent recession in the world's largest economy, which had spurred bets on large rate cuts in the US. The Institute for Supply Management said on Monday that its non-manufacturing Purchasing Managers Index increased to 51.4 last month from 48.8 in June. According to the CME FedWatch tool, expectations of a 50-basis-point rate cut at the next US rate decision in September fell to 75.5% today from near-certainty on Monday.

"That narrative (of a recession) is sort of required for such an aggressive view of rate cuts," a dealer at a private bank said. "Without a push from the MPC, I don't see the one-year swap rate staying below 6.50% consistently."

The Reserve Bank of India's rate-setting panel is expected to keep the repo rate and the policy stance unchanged this week with inflation still running above the central bank's target and growth staying robust, according to an Informist poll of 30 analysts. India's headline CPI inflation in June rose to a four-month high of 5.08% in June, and the consensus from economists is that the central bank will keep its projections for growth and inflation unchanged. In 2024-25 (Apr-Mar), the RBI sees India's GDP growth at 7.2% and CPI inflation at 4.5%.

Some traders were of the view that the fall in rates on Monday was overdone, but others continued to bet on a sustained decline even domestically. If the RBI does soften its stance after over two years of "withdrawal of accommodation", the market will firm up bets of a rate cut by December, dealers said. The one-year swap rose to a high of 6.56% earlier in the day, before retreating, as other traders were less convinced of such an outcome, and paid fixed rates earlier in the day.

"Betting on rate cuts is now a high conviction trade, with slightly more than 25 bps already priced in for 2024-25," a dealer at a foreign bank said. "The follow-on move should begin happening if the RBI members on the MPC begin letting go of their hawkishness this week." 

OUTLOOK

On Wednesday, 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%.

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 6.45-6.63% and in the five-year segment at 6.05-6.30%.

End

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

Edited by Saji George Titus

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.