India Money Market Outlook
Gilts seen up Mon after Powell's speech
This story was originally published at 22:09 IST on 23 August 2024
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MUMBAI – Government bond prices are likely to open higher on Monday after US Federal Reserve Chair Jerome Powell signalled a shift in the central bank's policy outlook at the Jackson Hole Economic Symposium. Dealers said he set the stage for rate cuts in the world's largest economy to begin in September.
"The time has come for policy to adjust," Powell said. "(The) labour market is no longer overheated, conditions are less tight...My confidence has grown that inflation is on a sustainable path back to 2%".
Powell's speech is the latest indication that the US Federal Open Market Committee will cut interest rates by at least 25 basis points at its upcoming meeting on Sep 17-18, dealers said. Overnight indexed swap rates are likely to fall after the US Fed chair's comments.
Traders will also keep a watch on the Reserve Bank of India's comments after Powell's speech, though the latest monetary policy minutes signalled that RBI members were not keen on easing domestic monetary policy conditions until CPI inflation had eased to the central bank's 4% target on a durable basis.
Gilts and OIS rates are not traded on Saturday. The call money market is shut this Saturday. Any sharp movement in crude oil prices may also lend cues to gilts and swap rates at the opening on Monday.
On Monday, the one-day call money rate may open around the repo rate of 6.50% due to demand for funds from banks in the early trading hours.
GOVERNMENT BONDS
On Monday, gilt prices may take cues from Powell's shift in policy outlook. With a rate cut cycle likely to begin in the US, dealers are optimistic that the Monetary Policy Committee may also begin cutting rates by December.
Prices of long-term gilts may rise less than short-term bonds due to a higher-than-expected supply of state government securities next week, dealers said. An RBI release after market hours showed 14 states would raise 362.50 bln rupees through bonds on Tuesday, against 294.00 bln rupees scheduled in the indicative calendar for Jul-Sep.
Foreign fund inflows are likely to continue due to Powell's indication of an imminent rate cut cycle in the US, along with India's inclusion in JP Morgan's emerging market index suite, a 10-month process that started on Jun 28. Bond purchases by banks will also be robust as they have to maintain larger buffers of liquid assets such as government securities due to an impending tightening of the liquidity coverage ratio guidelines.
The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.82-6.90% during the day. Today, the 10-year bond ended at 101.67 rupees, or 6.86% yield.
OIS RATES
On Monday, swap rates are likely to fall after US Fed Chair Powell's comments on the US interest rate trajectory at the Jackson Hole summit.
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%. Today, the one-year swap rate closed at 6.52% and the five-year at 6.08%.
CALL
On Monday, the one-day call money rate may open around the repo rate of 6.50% due to demand for funds from banks in the early trading hours. During the day, the call rate is seen in a range of 6.20-6.60%, dealers said. Today, the three-day call money rate ended at 5.75%.
LIQUIDITY
--Total net outflows of 196.52 bln rupees. Calculation of flows does not take into account redemption of the standing deposit facility and scheduled variable rate repo and reverse repos.
* Inflows
--9.88 bln rupees as coupon on state bonds on Saturday
--17.44 bln rupees as coupon on state bonds on Sunday
--6.16 bln rupees as coupon on state bonds on Monday
* Outflows
--230.00 bln rupees as payment for gilts on Monday
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Reported by Srijita Bose and Cassandra Carvalho
Edited by Ashish Shirke
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