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Informist, Monday, Sep 23, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady because of a lack of fresh cues on interest rates, either on the domestic front or globally. Traders are looking ahead of the US flash Purchasing Managers' Index reading for September for a trigger on US interest rates, dealers said.

The one-year swap rate ended at 6.39%, unchanged from Friday. The five-year swap rate ended at 6.01%, also unchanged from the previous close.

"If the data changes something, I guess we'll take note," a dealer at a private bank said. "Otherwise, there isn't a real reason to pay aggressively from such a small rise in US (Treasury) yields."

The yield on the 10-year US Treasury note was at 3.76% at the Indian market close today, against 3.73% at 1700 IST on Friday. Dealers were waiting for cues on the direction of US Treasury yields and monetary policy in the coming months, with the US presidential election scheduled for early November and the US Federal Open Market Committee's decision to kickstart its rate-cut cycle with an aggressive 50-basis-point reduction in interest rates.

The impact of India's flash Purchasing Managers' Index reading for September on swap rates was limited, and the indicator is not widely tracked in the domestic market yet, dealers said. India's private sector activity in September grew at the slowest pace in 2024, with both the services and manufacturing sectors witnessing a slowdown in expansion. The HSBC Flash India Composite Purchasing Managers' Output Index, compiled by S&P Global, declined to a nine-month low of 59.3 in September from the final print of 60.7 in August.

The slowdown in the domestic activity indicator suggested that rate cuts in India were closer than Reserve Bank of India officials have been suggesting, with a growth sacrifice kicking in due to high interest rates, dealers said. India's Monetary Policy Committee raised the policy repo rate by 250 basis points to 6.50% between May 2022 and February 2023, and has maintained it there since. A series of rate cuts beginning in the next three months has already been priced into swaps, with the benchmark one-year OIS rate pricing in a cut of nearly 75 bps over the next year, starting December, dealers said.

RBI staff expect GDP growth in Jul-Sep at 7.0%, 20 bps below the central bank's official forecast, according to the State of the Economy article in the central bank's Bulletin released Friday. In addition, the paper--which has RBI Deputy Governor and Monetary Policy Committee member Michael Patra among its authors–-did not add fresh warnings on inflation, dealers said. India's CPI inflation has eased below the RBI's 4% aim for the past two months, but is expected to pick up in September, something the paper warned about. 

"There was some receiving in the near-term contracts because the bulletin did not give anything incrementally negative on inflation, rather than an explicit positive," a dealer at a foreign bank said.

On the other hand, some traders paid fixed rates in swaps maturing below nine months owing to a consistently higher fixing of the overnight Mumbai Interbank Offer Rate, dealers said. Since Sep 13, the floating leg of the OIS contract has been set above 6.70%, well above the repo rate. Today, the fixing climbed to 6.80% as banking system liquidity fell into a deficit over the weekend, for the first time since late June.

OUTLOOK

OIS rates may open steady on Tuesday after US flash Purchasing Managers' Index data was mixed, which may not change US rate cut expectations much, dealers said. 

In data released after market hours, the flash Manufacturing Purchasing Managers' Index printed at 47.0, from 47.9 final in August, and below the forecast of 48.6 by Market News International. Flash Services Purchasing Managers' Index slightly beat the forecast of 55.2, but fell to 55.4 in September from a final reading of 55.7 in August. A Purchasing Managers' Index reading above 50 denotes expansion in activity, while a print below 50 indicates contraction.

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 Rajeev Pai

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