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Informist, Monday, Aug 12, 2024

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended higher as traders paid fixed rates on caution ahead of CPI inflation data for July in India and the US, dealers said. The one-year swap rate ended at 6.57%, up from 6.53% on Friday. The five-year swap rate ended at 6.13%, compared with 6.11% the previous day.

Non-residents have been receiving fixed rates in large volumes over the past week, and those volumes fell off today, dealers said.

India's CPI inflation data for July, which came after market hours, showed that headline inflation fell to a near five-year low of 3.54% in July, lower than the consensus estimate of 3.7%. This is the first time in nearly five years that retail inflation has fallen below the Reserve Bank of India's medium-term target of 4%. The decline was mainly on account of the statistical effect of a high base.

Offshore traders were more cautious about upcoming macroeconomic data in the US – July CPI inflation is scheduled for Wednesday, while retail sales data for July is scheduled for Thursday. The five-year swap rate fell to a low of 6.08% today before domestic traders paid fixed rates, dealers said. The five-year swap rate has tested that level multiple times over the past week, but has not fallen below it.

"The 6.08% level on the five-year swap rates is the bottom of a 15-year trendline," a dealer at a private bank said. "It is a very strong resistance (support for pushing up the rate) and is creating very high volumes."

The volumes in the five-year swap dwindled to their lowest this month today as traders said there were no significant cues before the data, dealers said. The notional traded amount for the five-year swap contract, which averaged over 100 bln rupees in August, fell to 67.45 bln rupees today.

Some traders were keen on paying fixed rates in swaps maturing in less than a year on the view that the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – may rise. The surplus liquidity the banking system has enjoyed since the beginning of July has begun to drain out, dealers said.

Over the next two weeks, the RBI's persistent foreign exchange activity and goods and services tax outflows may pull down banking system liquidity to near neutral from a surplus of 1.46 trln rupees on Friday. Consequently, overnight money market rates may also move to the marginal standing facility rate of 6.75%, against the 6.50% consistently seen over the past month, dealers said.

"I think it's a good time to pay short-term swaps, the rate cut pricing is too aggressive in swaps up to six months," a dealer at a foreign bank said. Currently, some short-term swap contracts, including the six-month contract, are showing a likelihood of rate cuts in December, dealers said.

OUTLOOK

On Tuesday, swap rates may open lower after India's CPI inflation print was lower than expected. Data released after market hours showed that CPI inflation fell to 3.54% in July from 5.08% in June. Core inflation rose to 3.4% in July from 3.1% the previous month.

US inflation and retail sales data for July is also awaited later this week for a better read on the trajectory of rate cuts in the world's largest economy, 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 6.43-6.63% 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 Saji George Titus

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