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Informist, Thursday, Sep 12, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady after a sharp fall on Wednesday. Domestic traders received fixed rates ahead of the release of India's CPI data at 1730 IST, which offset the impact of an overnight rise in US Treasury yields.

The one-year swap rate ended at 6.38%, against 6.39% on Wednesday, a fresh two-year low. The five-year swap rate ended at 5.95%, against 5.97% the previous trading day, marking another low since May 22, 2023.

Traders bet on a soft CPI inflation print for August cooling the tone of monetary policy in India, dealers said. Traders expected India's headline consumer inflation to cool to as low as 3.2% in August. An Informist poll of economists had estimated the print at 3.6%. A reading near 3% could lead to RBI officials, including Governor Shaktikanta Das, softening his tone on inflation control, or the Monetary Policy Committee easing its stance to 'neutral' from 'withdrawal of accommodation', at the next policy review in October, dealers said. After market hours, government data showed India's CPI inflation rose to 3.65% in August from a revised 3.60% in July.

Das has continuously pushed back against cutting rates in India in a hurry, until CPI inflation aligns to the RBI's 4% inflation target on a durable basis. According to the central bank's projections, this is not expected until beyond Apr-Jun 2025. Regardless, the one-year swap had almost fully priced in 75 basis points of rate cuts in India over the next 12 months, starting December.

"The pricing has already become quite aggressive ahead of CPI," a dealer at a foreign bank said. "There was not much offshore activity, but a domestic entity seems to have stop-losses yesterday (Wednesday) and is continuing to get out of those (paid fixed rate) positions."

US Treasury yields rose overnight, and even then, the five-year OIS rate opened steady as offshore traders did not unwind their received fixed rate bets in a hurry, dealers said. The yield on the 10-year benchmark note rose to 3.67% at the end of Indian market hours today from 3.62% on Wednesday. This was after the release of US CPI inflation data for July, which reduced expectations of a sharp 50-bps rate cut to start the US monetary policy easing cycle at the Federal Open Market Committee's policy review next week.

US CPI rose 0.2% on month in August, in line with expectations, and similar to the rise in July. On a yearly basis, the CPI was up 2.5%, rising by the slowest pace since February 2021. However, core CPI was up 0.3% in August, more than the expectation of a 0.2% rise. The CME FedWatch tool showed expectations of a 50-bps rate cut in the US next week dimmed to around 15%, with Fed funds futures now showing a vast majority expecting only a quarter-point cut.

"Even though the odds of a 50-bps rate cut in September are going down, the extra 25-bps cut is just being transferred over to the next policy," a dealer at a primary dealership said. "So until the US market chops off a rate cut or two from the 110 bps expected in 2024, we are going to continue to see pressure on the downside." 

OUTLOOK

On Friday, swap rates are seen opening higher as traders are likely to unwind their bets taken today on India's CPI inflation being lower than expected, dealers said. The CPI reading did not make a case for the MPC softening its policy stance in October, though rate cuts may still occur by December.

CPI inflation for August was higher than expected at 3.65%, against an Informist poll estimate of 3.6% and traders' expectations of 3.2%. Food price inflation was 5.66% last month, against 5.42% in July. CPI inflation is expected to rise above 4% in September, after two months below the RBI's target due to the statistical effect of a high base, dealers said.

In the US, weekly jobless claims were at 230,000 in the week ended Saturday, against 225,000 estimated by Dow Jones. The US producer prices index rose 0.2% on month in August, in line with expectations, though stripped of volatile factors such as food and fuel, the price rise was slightly higher than anticipated. All eyes are on the Federal Open Market Committee's rate decision on Wednesday, with expectations not changing materially after the US data.

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 6.35-6.53% and in the five-year segment at 5.90-6.10%.

End

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

Edited by Avishek Dutta

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