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Informist, Wednesday, Aug 14, 2024

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended slightly lower as offshore traders received fixed rates after US producer prices rose less than expected in July, dealers said. The one-year swap rate ended at 6.52%, against 6.53% on Tuesday. The five-year swap rate ended at 6.08%, compared with 6.12% the previous day.

After cooling off in the last few days, foreigners were receiving fixed rates again in large quantities, particularly in the five-year swap rate, dealers said. The Producer Price Index for final demand in the US rose 2.2% on a yearly basis in July, US government data Tuesday showed. This reading was below the market expectation of 2.3% and the 2.7% increase in June. The annual core Producer Price Index rose 2.4% in July, short of analysts' estimate of 2.7%.

"Offshore slows have returned to the market," a dealer at a foreign bank said. "We are not sure of the reason but looks like some interest has returned to the Indian market after US data."

The reading did not move the needle on US rate-cut expectations but was another data point which showed that the US rate-cut cycle would begin in September, dealers said. According to the CME FedWatch tool, Fed funds futures reflected an almost even split between expectations of a 25- and a 50-basis-point cut by the US Federal Open Market Committee in September. Following the data, the yield on the 10-year benchmark US Treasury note fell to 3.85% from 3.89% at the Indian market close Tuesday.

The producer price data was only one part of a key doubleheader on inflation readings in the US. Traders were wary of placing large bets, particularly in OIS rates up to one year, dealers said. According to a Dow Jones poll, US core and headline CPI were both expected to have risen 0.2% on month in July. On an annual basis, headline inflation was expected to be unchanged from June at 3.0%, while core inflation was expected to print at 3.2% on year. In data released at 1800 IST, US CPI inflation was in line with expectations.

Nomura today retained its high conviction call to receive fixed rates in the two-year non-deliverable overnight indexed swap, targeting a fall to 6.00% by September-end. "We still prefer the NDOIS (non-deliverable OIS) curve at this juncture given its higher-beta nature and the prospects for more easing to be priced in," Emerging Markets–Asia Rates Strategist Nathan Sribalasundaram said in a note. The overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--is likely to be fixed at 6.55-6.60% over the next couple of months, he said in the note.

OUTLOOK

On Thursday, Indian financial markets are shut for Independence Day. On Friday, swap rates may open steady as the reaction to US CPI inflation was muted. With the data in line with expectations, the market's view on the rate-cut trajectory had not changed significantly, 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 Rajeev Pai

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