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Informist, Tuesday, Sep 17, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates inched up today on caution ahead of the US Federal Open Market Committee outcome on Wednesday. While offshore traders received swap rates early in the day, the receiving eased in the second half, and domestic traders were consistently paying fixed rates, dealers said.

The one-year swap rate ended at 6.39%, against 6.37% on Monday. The five-year swap rate ended at 5.97%, against 5.95% the previous day.

Domestic traders were keen to pay swap rates at current levels. At their lowest levels this month, the one-year OIS rate has fallen by as much as 13 basis points and the five-year swap rate has fallen by 16 bps. The view on domestic rate cuts remains hazy, though the one-year swap rate is pricing in nearly 75 bps of rate cuts until October 2025, dealers said.

"People got an opportunity to pay today after a consistent fall in rates," a dealer at a private bank said. "There was also some last-minute positioning before FOMC, and there is a sense that most of the rally is behind us."

Traders have been increasing their bets on a 50-bps rate cut in the US over the past few days. A cut of that quantum would continue to push OIS rates lower. In addition to some domestic traders, offshore activity in the OIS market has picked up sharply ahead of the US Federal Reserve's policy decision, largely receiving fixed rates, dealers said.

The two-day meet begins today, and traders will not have an opportunity to trade further ahead of the decision at 2330 IST on Wednesday. The Reserve Bank of India shifted the scheduled holiday for Id-e-Milad to Wednesday from Monday, following the Maharashtra government's announcement notifying the change.

According to the CME FedWatch tool, Fed fund futures show a 65% chance of a 50-bps rate cut against only 34% a week ago, while the remaining a 25-bps rate cut. Dealers said that even if the Fed does not cut rates by 50 bps this month, the pace of further rate cuts would be closely tracked.

Fed fund futures indicate around 100 bps of rate cuts in 2024. Along with the policy outcome, Fed officials will give out a summary of their economic projections on interest rates, growth and inflation along with the rate decision.

"There has been enough for traders to do on OIS, and plenty of money has already been made," a dealer at a primary dealership said. "Let's wait for the FOMC to see where the market will go."

OUTLOOK

Indian money markets are shut on Wednesday for Id-e-Milad. Swap rates are seen taking cues from the US FOMC rate decision and the outlook of Fed officials on interest rate cuts when the market opens on Thursday, dealers said. The US policy decision is due at 2330 IST on Wednesday.

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 Ashish Shirke

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