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Informist, Thursday, Sep 19, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended largely unchanged after the US Federal Open Market Committee's 50-basis-point rate cut on Wednesday. Traders said the sharp cut in the US rates was largely priced in by the market well before the outcome.

The one-year swap rate ended at 6.39%, unchanged from Tuesday. The five-year swap rate ended at 5.99%, against 5.97% the previous day. India's money markets were shut on Wednesday for Id-e-Milad. All contracts of OIS on the Clearing Corp of India Ltd ranging from one month to 10 years were traded today, a rarity. 

The FOMC opted to begin its rate cuts on an aggressive note on Wednesday, cutting rates for the first time since 2020 and bringing down the Fed funds target range from an over-two-decade high. Prior to the policy, Fed funds futures showed a 65% probability of a 50-bps rate cut, according to the CME FedWatch tool. The remainder saw only a 25-bps increase. 

Eleven of the 12 FOMC members voted for the 50-bps cut in interest rates, while Michelle Bowman voted for a more modest 25-bps cut. US Federal Reserve Chair Jerome Powell also said that sharp rate cuts should not be seen as a regular feature of the current rate easing cycle. The US rate-setting panel would continue to be data-dependent on making the call for a change in rates, he said at the post-FOMC press conference.

The updated summary of economic projections from US Fed officials guided for another 50-bps cuts in 2024, though there were seven of 19 officials who saw no more than 25-bps of further rate cuts. The projections also showed 100 bps of policy easing in 2025 to 3.25-3.50%, suggesting a 200-bps rate cut in total over the next 15 months.

"OIS has been getting received consistently over the last month, so the movement with regard to FOMC has already happened," a dealer at a foreign bank said. "We are seeing a little over 75 bps rate cuts in the one-year swap, which is fairly priced if the US cuts rates by 200 bps. But when will rate cuts (in India) actually begin?" 

Traders firmed up bets that the Monetary Policy Committee will cut the policy repo rate from 6.50% starting in December, dealers said. Domestic traders have not been able to bet big on rate cuts in India as Reserve Bank of India Governor Shaktikanta Das and other central bank officials have consistently pushed back against rate cuts until headline inflation is durably in line with the RBI's 4% aim. Projections do not show inflation reaching this aim even by Apr-Jun of 2025.

Regardless of the rate cut in the US, the yield on the 10-year benchmark US Treasury note rose to 3.71% today from 3.61% at the time the Indian market closed Tuesday, as fears of higher inflation down the road pushed up long-term bond yields. This pushed up the five-year OIS rate both at the beginning and end of trade, with some traders taking the opportunity to unwind their paid fixed rates positions, dealers said.

"Volumes were all there in the five-year swap, because it went everywhere today," a dealer at a private bank said. "First up, then down, then it was floating, and then it went to almost 6% again. So people are still trying to figure out what to price." 

OUTLOOK

Swap rates are seen opening higher after US weekly unemployment claims were lower than expected, weakening the case for further rate cuts in the US, dealers said.

Initial claims for state unemployment benefits fell 12,000 last week to a fourth-month low, seasonally adjusted value of 219,000. Incoming US data is closely eyed for the pace of US rate cuts, after the FOMC began its rate-cutting cycle with an aggressive 50-bps rate cut 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 Deepshikha Bhardwaj

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