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Informist, Monday, Aug 26, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates fell to their lowest in over a year after US Federal Reserve Chair Jerome Powell said the time had come to bring down interest rates, dealers said. The movement was driven by offshore traders receiving fixed rates.

The one-year swap rate ended at 6.48%, the lowest since Sep 14, 2022, against 6.52% on Friday. The five-year swap rate ended at 6.05%, the lowest since Jun 6, 2023, against 6.08% the previous trading day.

Speaking at the Jackson Hole Economic Symposium on Friday, Powell signalled that the central bank is poised to start cutting interest rates soon, with diminished upside risks to inflation hitting the Fed's 2% target, and increased downside risks to employment. Though he did not detail the timeline and the quantum of rate cuts, he warned that further job market cooling would be unwelcome, suggesting a shift towards monetary policy easing. Since he did not use the word "gradually" when referring to interest rate cuts, traders interpreted this as opening the door for more aggressive rate cuts than the 25 basis points each that has been factored in for the Federal Open Market Committee's meetings in September, November and December, dealers said. 

"Powell has finally said what the market wants to hear," a dealer at a foreign bank said. "It is still quite enthusiastic in terms of pricing, but I think the risks of overestimating the Fed (in terms of rate cuts) are decreasing day by day."

According to the CME FedWatch tool, Fed funds futures showed the odds of a 50-bps rate cut rose to 36.5% at the September policy review, from 24.0% a week ago. A rate cut of at least 25 bps in September has been fully priced in since early August.

While offshore traders were consistently receiving fixed rates, some domestic traders unwound their received fixed rate bets at the day's low of 6.03% and took profits, dealers said. The limited fall in US Treasury yield also pulled up the five-year swap rate from lows. The yield on the 10-year benchmark US Treasury yield fell to 3.81% at the end of Indian market hours from 3.86% on Friday, bouncing up from the crucial 3.78% mark, dealers said.

While the certainty of rate cuts in the world's largest economy increased, traders said there was no guarantee that India would follow suit in a hurry. India's CPI inflation will not average 4% or below for any quarter till Apr-Jun, according to the RBI's latest projections.

Comments of Reserve Bank of India members on the Monetary Policy Committee, including Governor Shaktikanta Das, in the minutes of the August monetary policy meeting, suggest that interest rate cuts may not come about until CPI inflation durably aligns with the central bank's 4% target. The six-member panel is also due to get three new external members before the next meeting in October, adding to the policy uncertainty on the domestic front, dealers said.

However, some traders received fixed rates in swaps maturing until June, betting on a shallow but quick rate cut cycle in India. While some traders said that a 50-bps point rate cut was largely priced in for 2024-25 (Apr-Mar), others bet on a 75-bps rate cut between December and June, following an aggressive rate cut cycle by the US Fed.

"Trade has moved to the shorter tenures because the rate cuts are closer now, all the action is within this financial year," a dealer at a primary dealership said. "Going into the one-year swap is actually taking you to a lot of policies you have no interest in, because the consensus view is that rate cuts in India will be shallow, 50 or 75 bps."

OUTLOOK

On Tuesday, swap rates may open steady due to lack of cues on interest rates, 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 6.43-6.58% and in the five-year segment at 5.95-6.18%.

End

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

Edited by Tanima Banerjee

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