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Informist, Thursday, Aug 29, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady due to a lack of significant cues on interest rates. Traders looked ahead to key data in India and the US for triggers on the pace and quantum of rate cuts, dealers said. 

The one-year swap rate ended at 6.49%, against 6.48% on Wednesday. The five-year swap rate ended at 6.07%, against 6.06% the previous trading day.

The notional traded amount in the two-month swap rate contract rose to 34.00 bln rupees, the most in four months, though the swap rate was largely unchanged. This was likely a corporate house or other investor hedging its interest rate exposure in the near-term, similar to trades that happened in the three-month contract on Wednesday, dealers said.

While the one-year swap contract saw lacklustre trade, the two-year contract saw an uptick in volumes as traders placed bets on the rate view towards the end of 2025, dealers said. The two-year and five-year contracts also saw modest volumes despite a lack of offshore activity as foreign banks paid fixed rates to protect their exposure to bond forward-rate agreements with insurers.

"Some people are trying to gauge how much of a rate cycle in India makes sense, which I think is going to be heavily dependent on the FOMC and then if food inflation here remains under control," a dealer at a foreign bank said. "Right now, there are about 75 bps of rate cuts priced in around the next 15 months, until Oct-Dec next year." 

Most traders expect only a shallow rate cut cycle in India between December and June, of only 50 basis points. Fitch Ratings also said today that it expects one 25 bps repo rate cut in India each in 2024-25 (Apr-Mar) and the next financial year, with the ratings agency affirming India's sovereign rating at 'BBB-' with a stable outlook.

"It was another day with no cues, and so it is waiting game, waiting for data to tell a different story than the one that is already priced in," a dealer at a private bank said.

There have been no domestic triggers to reduce the uncertainty on when the Reserve Bank of India's Monetary Policy Committee will cut interest rates, dealers said. While major central banks, including the US Federal Reserve, seemed to be on the cusp of an interest rate cut cycle, central bankers in India did not seem close to rate cuts. Adding to the policy uncertainty was the fact that the terms of the three external panel members are scheduled to come to an end before the next policy, including the two who had voted for rate cuts in August. The RBI's forecasts do not show a single quarter of sub-4% inflation, the central bank's target, until at least Apr-Jun 2025.

On the global front, the yield on the 10-year US Treasury note was unchanged at 3.83% from the close of Indian market hours on Wednesday. While Brent crude prices for October delivery have been volatile, dealers said India's inflation dynamics are not likely to change significantly as long as the oil futures contracts stay between $75 and $85 a bbl.

The US GDP growth in Apr-Jun was expected at 2.8%, unchanged from the previous quarter, and rose to 3.0% in data released after market hours. Instead of the broader growth, domestic traders were of the view that the weekly unemployment claims data would have a more significant impact on US interest rate expectations. Before the release of the data at 1800 IST, Fed funds futures showed about a 35% chance of a 50-basis-point rate cut at the next US Federal Open Market Committee meeting in September, with the remainder betting on a 25-bps rate cut.

This was the first labour data since US Federal Chair Jerome Powell had said on Friday that he does not welcome further weakening of the labour market, and that it would do everything to support a strong labour market. More unemployment claims would mean stronger chances of a higher rate cut in the US. Dow Jones estimated the initial jobless claims at 230,000 this week, and the final print was 231,000.

Looking ahead, India's GDP print for Apr-Jun, scheduled for after market hours at 1730 IST on Friday, may be a significant trigger for short-term OIS rates, dealers said. Dealers estimate the GDP growth print at around 6.5-6.9%, against the RBI's forecast of 7.1%. An Informist poll of 21 economists showed that India's GDP growth likely fell to a five-quarter low of 6.9% due to restrained government spending in the June quarter. Dealers said any sign of economic momentum slowing down would add to the rate cut hopes in India.

OUTLOOK

Swap rates are seen opening steady on Friday. US growth and labour market data released after market hours today was on the expected lines, and did not move the needle on US rate cut expectations, dealers said. 

In the June quarter, the US GDP grew 3.0% against a forecast of 2.8% compiled by Dow Jones. Meanwhile, initial unemployment claims for the week ended Saturday were 231,000, against a consensus market expectation of 230,000. The figure was largely unchanged from the previous week as well.

India's GDP numbers on Friday may hold significance if they surprise on the downside, making the case for quicker rate cuts, dealers said. RBI officials on the Monetary Policy Committee, including Governor Shaktikanta Das, have so far shied away from terming growth anything other than strong. The US Fed's preferred inflation gauge--the Core Personal Consumption Expenditures Price Index--for July is also due after market hours. 
 

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 6.00-6.18%.

End

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

Edited by Deepshikha Bhardwaj

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