India IRS Review
Steady on lack of fresh cues on interest rates
This story was originally published at 20:55 IST on 27 August 2024
Register to read our real-time news.Informist, Tuesday, Aug 27, 2024
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended little changed today due to a lack of significant cues on interest rates, dealers said. A rise in US Treasury yields was disregarded for the most part, though the five-year swap rate inched up near the end of trade.
The one-year swap rate ended at 6.49%, against 6.48% on Monday. The five-year swap rate ended at 6.07%, against 6.05% the previous trading day.
Traders were cautious of taking aggressive bets ahead of US GDP data on Thursday and personal consumption expenditure price data on Friday. Moreover, there were no fresh cues to trade on today after swap rates hit multi-month lows on Monday, dealers said.
Informist exclusively reported today that non-residents had compressed their portfolios last week, which had opened up statutory limits on derivatives trading. The fresh availability of limits following the portfolio compression has allowed foreign portfolio investors to increase their rate bets on India, especially amid increasing certainty of imminent rate cuts in the US starting September.
Over the past week, offshore receiving of fixed rates across OIS contracts traded on CCIL has increased, even as flows towards the rest of Asia have been stagnant, dealers said. India's one-year OIS rate fell to a near two-year low on Monday, while the five-year swap rates ended at their lowest since Jun 6, 2023.
"We could be in a consolidation phase on the swaps now," a dealer at a foreign bank said. "There could be some paying as we wait for fresh cues from the data this week."
The yield on the 10-year benchmark US Treasury note rose to 3.85% at the end of Indian market hours today, from 3.81% at 0900 IST, ahead of a heavy week of sales of US Treasury debt. Moreover, traders pared bets on a 50-basis-point interest rate cut by the US Federal Open Market Committee in September despite Federal Reserve Chair Jerome Powell saying it was time to cut interest rates.
According to the CME FedWatch tool, Fed funds futures showed only a 28.5% chance of a 50-bps rate cut, with at least a 25-bps rate cut fully priced in. A further impetus to US Treasury yields, and greater rate cut hopes in India, would only happen with a 50-bps rate cut in the US, dealers said. While Powell left the pace of rate cuts to incoming economic data, dealers were of the view that recent US data on labour and inflation does not signal a recession is imminent.
"The (US) non-farm payrolls in August may be a bit on the stronger side," a dealer at a private bank said. "So it is not looking likely that data will show up any surprises to make the case for a 50 bps rate cut between now and then." The FOMC rate decision is scheduled for Sep 18.
Interest rate cuts in India seemed uncertain, though some traders had placed bets on a shallow 50-bps rate cut cycle in 2024-25 (Apr-Mar), drawing trade volume to the six-month OIS contract. Other traders were pricing in another rate cut but a more delayed policy easing: the two-year swap rates was pricing in around 75 basis points of rate cuts in 15 months, dealers said.
OUTLOOK
On Wednesday, swap rates may open steady due to a lack of triggers, dealers said. Traders look ahead to US growth and inflation data, as well as India's GDP release on Friday, for cues on interest rates.
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%.
| At 1700 IST | MONDAY |
1-year OIS | 6.49% | 6.48% |
2-year OIS | 6.17% | 6.16% |
5-year OIS | 6.07% | 6.05% |
2-year MIFOR | 6.34-6.46% | 6.29-6.41% |
5-year MIFOR | 6.47-6.59% | 6.42-6.54% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Akul Nishant Akhoury
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