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Informist, Friday, Sep 13, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady after recent volatility heading into the US Federal Open Market Committee's rate decision on Wednesday. Offshore activity in India's OIS rates has shot up on bets of the US rate-setting panel commencing a rate cut cycle next week, dealers said. 

The one-year swap rate ended at 6.38%, flat against Thursday's close. The five-year swap rate ended at 5.96%, from 5.95% the previous day. Both swap rates remained at multi-month lows.

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. Rate cut expectations did not change materially after the US data, and US Treasury yields were little changed from Thursday's close. 

However, analysts' comments moved up bets on a 50-basis-point rate cut overnight. US Fed funds futures showed a nearly even split between expectations of a 25- and 50-bps rate cut to start the rate cut cycle, according to the CME FedWatch tool.

"Offshore receiving has been coming in due to the fall in US yields and crude," a dealer at a foreign bank said. "That momentum was still very strong early in the day, but faded in the latter part."

Brent crude prices for November delivery were up around 2% overnight, and rose further to around $72.50 a bbl by the end of Indian market hours. Moreover, domestic traders paid fixed rates as they were of the view that domestic swap rates would not fall further. Already, there were plenty of rate-cuts factored into OIS rates, which was stretching of any rate-cutting cycle by the RBI's Monetary Policy Committee that is likely to be shallow and not exceed 75 bps, dealers said. 

Traders had bet on a soft CPI inflation print for August cooling the tone of monetary policy in India, but that disappointed the market, 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 lower reading may have prompted RBI 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. 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. 

After market hours, data showed India's CPI inflation rose to 3.65% in August from a revised 3.60% in July. Food price inflation was 5.66% last month, against 5.42% in July. The print lowered the chances of a monetary policy stance at the next MPC meeting in October, though rate cuts may still occur by December, dealers said.

"Three quarter-point rate cuts are already priced in, which is more than consensus two weeks ago, even though nothing has really changed in terms of data or narrative," a dealer at a private bank said. "Even if you're bullish, it's difficult to initiate receiving from here (on short-term swaps).

OUTLOOK

Money markets will remain shut on Saturday, and on Monday for Id-e Milad. Swap rates are seen opening steady on Monday, with all eyes on the Federal Open Market Committee's rate decision on Wednesday, dealers said. Expectations are evenly split between a 25- and a 50-bp rate cut, according to the CME FedWatch tool. 

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 Deepshikha Bhardwaj

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