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Informist, Monday, Oct. 1, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended off highs as US Treasury yields and crude oil prices eased during the day. Offshore traders were unwinding received fixed rates early in the day, leading to a rise in OIS rates, dealers said.

The one-year swap rate ended at 6.38%, unchanged from Monday's close. The five-year swap rate ended at 6.02% from 6.03% at the previous close.

Late Monday, US Federal Reserve Chair Jerome Powell said that the Fed will cut rates 'over time', suggesting a preference for 25 bps rate cuts in 2024. Powell's speech decreased traders' expectations of a 50 bps cut at the FOMC meeting in November, causing US yields to rise. According to the CME FedWatch tool, expectations of a 50-bp rate cut fell to 36.4% at 1945 IST from 58.2% a week ago.

"More of unwinding rather than paying from offshore," a dealer at a primary dealership said. "Incrementally, Powell's speech was bad for those betting on aggressive rate cuts." 

However, the yield on the 10-year US Treasury note fell to 3.75% at 1700 IST, from 3.79% when the domestic market opened Tuesday. A fall in crude oil prices intraday also pulled down swap rates. Brent crude for December delivery slipped below the crucial $70 per barrel mark during trade, due to stronger supply expectations for December with views of lower demand after China's economic slowdown.

Meanwhile, short-term swap contracts saw heavy trade volumes for the second straight day on hopes of a softer policy tone at the monetary policy review next week. Dealers were of the view the Reserve Bank of India will at least begin to acknowledge risks to its growth forecast of 7.2% for 2024-25 (Apr-Mar). In addition, the US Federal Open Market Commitee's decision to begin its rate-cutting cycle with a larger-than-expected 50-bps cut in September also allows the MPC to begin easing monetary policy, dealers said.

Consequently, traders took bets that the panel would change its policy tone to "neutral" from the current "withdrawal of accommodation". The one-year swap rate is already pricing in rate cuts totalling 50-75 bps starting with a 25-bp decrease in December. The six-month swap rate fell 3 basis points to 6.58%.

"Two things are happening together that are positive for the short-term swaps. One is that MPC is firmly in focus, and it is expected to be more dovish. The other thing is that overnight rates are now going to be a little lower, after going haywire in the last few days before quarter-end," a dealer at a private bank said.

The overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--was set at 6.55% Tuesday. In the last 13 trading days of September, it has been set at 6.70% or higher on 11 days, against the policy repo rate of 6.50%.

OUTLOOK

India's financial markets are shut on Wednesday for Gandhi Jayanti. On Thursday, swap rates may take cues from the movement in US Treasury yields and crude oil prices, dealers said.

The impact of US manufacturing Purchasing Managers' Index reading on the US interest rate view may lend direction to swap rates. Further escalation in the conflict around Israel in West Asia may also be a trigger. 

The ongoing conflict in West Asia may soon escalate further as Iran is preparing to "imminently" launch ballistic missiles on Israel, global news agency Associated Press reported Tuesday. The attack, if it happens, will bring "severe consequences" for Iran, two US administration officials told AP.

Post market hours, the government reconstituted the MPC with three new external members. It appointed Ram Singh, director of Delhi School of Economics; Saugata Bhattacharya, an economist; and Nagesh Kumar, director and chief executive at Institute for Studies in Industrial Development to the panel. Three members of the six-member panel are chosen from outside the RBI for a term of four years. The three external members will replace Jayanth Varma, Ashima Goyal and Shashanka Bhide in the upcoming MPC meeting starting Monday. Goyal and Varma had voted for a 25-basis-point rate cut in the August meeting, against the majority of the panel, who preferred to keep rates unchanged.

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 Akul Nishant Akhoury

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