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Informist, Thursday, Oct. 3, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates ended higher Thursday as escalation in conflict in the West Asia region drove crude oil prices higher and traders trimmed bets of a softer monetary policy tone next week, dealers said. A rise in US Treasury yields also contributed to traders paying fixed rates, they said.

The one-year swap rate ended at 6.42%, the highest level since Sept. 10, against 6.38% on Tuesday. The five-year swap rate ended at 6.08%, the highest in a month, against the previous close of 6.02%.

Indian financial markets were shut Wednesday on account of Gandhi Jayanti. Brent crude futures for December delivery rose to near $75 a barrel at the time Indian market closed Thursday against $71.20 a barrel at the end of Indian market hours on Tuesday. Crude oil prices continued to rise due to chances of the West Asia conflict impeding supply of the commodity.

On Tuesday, Iran fired more than 180 missiles at Israel. This was in response to Israel killing Hezbollah leader Syyed Hassan Nasrallah on Saturday. US news website Axios Wednesday reported that Israel's retaliation could include targeting Iranian oil production facilities amongst other strategic sites. While Iran has said that its missile attacks on Israel are over, any response from Israel would be answered with widespread destruction, the report said.

"People are worried that this conflict could exert pressure on crude oil prices, this is why we are seeing heavy paying today," a dealer at a private bank said. "US yields have also risen, the recent data showed signs of a stronger economy than what was expected."

The yield on the 10-year US Treasury note rose to 3.81% at close of the Indian market Thursday against 3.75% on Tuesday. US yields rose Wednesday, and further Thursday, after US economic data suggested the labour market was not cooling as quickly as feared. Private payrolls increased by a more-than-expected 143,000 jobs in September, according to ADP employment data, above the 120,000 rise estimated by economists polled by Reuters.

The shorter-term swap contracts saw heavy trade volumes, the same as earlier this week, as traders readjusted their bets on the outcome of the Monetary Policy Committee's meeting on Wednesday. Traders had expected a change in stance to 'neutral' from the current 'withdrawal of accommodation' by Reserve Bank of India's rate-setting panel at its three-day meeting that starts Monday, dealers said. These hopes faded due to the geopolitical tensions.

"The shorter-tenure papers have gained volumes today as traders' expectations of a stance change in October are fading after an escalation in the Middle East," a dealer at a primary dealership said. "Liquidity is also quite high, so rather than going for a 3-month T-bill (Treasury bill) it is better to place a receiving position in 3-month swap contract."

According to RBI data, on Wednesday, the surplus systemic liquidity widened to INR 2.13 trillion, the highest since Sept. 6. Meanwhile, the RBI set the cut-off yield on the 91-day T-bill at 6.47% at auction Thursday, the lowest in over 20 months and the first time since Apr. 27, 2022 it has fetched a yield below the policy repo rate. In contrast, the three-month OIS rate ended at 6.59% Thursday, above the repo rate of 6.50%.

OUTLOOK

On Friday, swap rates may take cues from the movement in US Treasury yields and crude oil prices. The market will also be sensitive to any developments in the West Asia conflict, dealers said.

Traders await ISM's services purchasing managers' index for September due at 1930 IST, and then the government's non-farm payrolls data for September due Friday, for cues on rate cuts in the US. On the domestic front, the market awaits the outcome of the RBI's monetary policy meeting, dealers said. Expectations on monetary policy easing in India are mixed due to the rise in crude oil prices, dealers said. 

The swap rate in the one-year segment is seen at 6.37-6.55% and in the five-year segment at 6.00-6.18%.

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Ashish Shirke

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