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Informist, Wednesday, Aug 7, 2024

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended on a mixed note today. The one-year swap rate closed at a near 23-month low as traders aggressively bet on the Reserve Bank of India's Monetary Policy Committee to change its stance to "neutral" from "withdrawal of accommodation" on Thursday, dealers said.

The one-year swap rate ended 3 basis points lower at 6.49%, the lowest since Sep 14, 2022. The contract's traded notional value on the Clearing Corp of India's 'ASTROID' platform hit its highest since Aug 10 last year. The five-year swap rate ended at 6.11%, compared with 6.12% on Tuesday.

RBI Governor Shaktikanta Das will detail the outcome of the three-day policy review at 1000 IST on Thursday. OIS rates have been under pressure in the lead up to the outcome, with increasing bets of the monetary policy stance changing to "neutral" from "withdrawal of accommodation", 13 MPC meetings after the phrase was adopted in April 2022.

The push came largely from offshore traders early in the day. Foreign banks in India also received fixed rates on their proprietary portfolios, dealers said. Domestic traders had hit stop-losses earlier this week on their paid fixed rate bets, and unwound those positions, but were not keen to pay higher rates before the close of trade. An important corollary of the stance change view was that the MPC might then decide to cut the repo rate by December, instead of waiting till 2025, dealers said.

"Large sums of offshore receiving in the one-year segment today," a dealer at a primary dealership said. "All of it was betting on a change in stance."

The rate-setting panel was already close to changing stance, with two dissensions on the status quo vote in the previous policy review in June, dealers said. The central bank had also let the surplus liquidity in the banking system rise to over 2.5 trln rupees, inconsistent with the "withdrawal of accommodation", without any significant durable measures to mop-up liquidity, they said.

Last week, the US Federal Open Market Committee pointed to risks to its dual mandate of inflation and jobs, after stressing on only inflation over the last two years. Following the statement, the US unemployment rate rose to a near-three-year high of 4.3% in July.

The five-year swap rates ended off lows, with higher-than-usual volumes as well, as traders weighed a rise in US Treasury yields against the domestic rate view. US yields rose after Federal Reserve officials eased fears of a recession in the world's largest economy, which was seen heralding an aggressive US rate cut cycle beginning in September. San Francisco Fed President Mary Daly accepted that the US economy was slowing, but denied it was falling off a cliff.

On Monday, Chicago Federal Reserve President Austan Goolsbee cautioned against too much signal from a global market sell-off. He said it stemmed in part from the Bank of Japan's decision last week to raise rates. He said that US 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. 

Amid market turmoil across the globe, some sections of the market remained unconvinced that the MPC would change its monetary policy stance on Thursday. There were risks that the RBI would prefer to retain its stance and clamp down on the liquidity surplus considering India's inflation and growth, dealers said. 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%.

"The receiving (of fixed rates) intensified after foreign traders saw that there was not much reaction to US Treasury yields," a dealer at a private bank said. "I wouldn't be surprised if we see similar volumes tomorrow (Thursday) – at least one side of the market will be wrong-footed."

OUTLOOK

On Thursday, swap rates may open steady before RBI Governor Das details the outcome of the Monetary Policy Committee meeting at 1000 IST. Analysts expect the panel to maintain status quo on both the repo rate, at 6.50%, and policy stance at "withdrawal of accommodation", according to an Informist poll.

Increasingly, traders are betting on a stance change at the upcoming meeting to "neutral" from "withdrawal of accommodation". If the stance does soften, the 1-year swap may fall to around 6.45%, with a rate cut in December fully priced in, and two 25-bps rate cuts projected in 2024-25 (Apr-Mar). If the MPC chooses to maintain status quo on rates and stance, the 1-year swap rate could rise to over 6.55%

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 6.43-6.63% and in the five-year segment at 6.00-6.25%.

End

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

Edited by Aditya Sakorkar

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