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Informist, Tuesday, Oct. 8, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates ended lower Tuesday as traders placed bets ahead of the Reserve Bank of India's Monetary Policy Committee outcome on Wednesday, dealers said. Momentary paying due to an overnight rise in US yields failed to sustain towards the end of trade, dealers said.

The one-year swap rate ended at 6.46% against 6.50% on Monday, while the five-year swap rate settled at 6.14%, against the previous close of 6.18%.

"Many traders are receiving right now because it is quite risky heading toward MPC and the shorter-term contracts are the cheapest option to do that," a dealer at a private bank said. "Even though a lot of people don't expect a change in stance, why should one risk it?"
 

Ahead of the MPC decision, the market had mixed views on the possible change in stance by the rate-setting panel. While some traders expect the MPC to change its stance to 'neutral', a majority expects the committee to continue with the 'withdrawal of accommodation' stance.

Most market participants expect the committee to retain its stance because of the appointment of new external members. The new external members of the MPC may not differ from the RBI's opinion given that it will be their first meeting, dealers said. The bets on the MPC rate decision were largely taken from domestic traders, with offshore traders likely unwinding their paid fixed-rate bets.

The government last week appointed economist Saugata Bhattacharya, Director of the Delhi School of Economics Ram Singh, and Chief Executive and Director of the Institute for Studies in Industrial Development Nagesh Kumar as external members of the MPC in place of Shashanka Bhide, Jayanth Varma, and Ashima Goyal. Varma and Goyal had voted in favour of a rate cut in August.

The divided opinion led to an increase in the volume of short-tenure swap contracts, dealers said. The volume of the three-month OIS contract was three-quarters that of the one-year contract on the Anonymous System for Trading in Rupee OTC Interest Rate Derivatives.

Meanwhile, a development bank likely received fixed rates during the day in the five-year swap as the contract hit a two-month-high. On Monday, the one-year swap rose to levels that were last seen on Sept. 3, while the five-year contract rose to levels last seen on Aug. 1. The bank was looking to protect the interest rate risk of its recent bond issuance, dealers said. 

"There was paying happening earlier, but then someone has been constantly receiving at 6.1350% (on the five-year OIS) level," a dealer at another private bank said. "It seems to be some kind of hedging."

In the first half of trade, the market moved in a thin band with little paying from traders both onshore and offshore. However, it could not be sustained due to the absence of significant movement in US Treasury yields intraday, dealers said.
 

The yield on the 10-year US Treasury note rose to as high as 4.03% during the session from 4.01% at 1700 IST on Monday. US yields rose on Monday, driven by strong labour market data for September. The Fed funds futures showed expectations of a 50-basis-point rate cut at the next Federal Open Market Committee has been wiped out, compared with 36.8% a week ago, according to the CME FedWatch tool. The chances of a 25-bp rate cut have increased to 88.2%, and the possibility of no rate cuts is back on the table. 

OUTLOOK

OIS rates may open steady on Wednesday on caution ahead of RBI Governor Shaktikanta Das' speech detailing the monetary policy decisions at 1000 IST. Traders remain divided on the likelihood of the rate-setting panel changing its stance to neutral from 'withdrawal of accommodation', dealers said. 

The market also awaits the release of the US Federal Open Market Committee September meeting minutes due at 2330 IST on Wednesday. The minutes will hold significance as they will offer insights into the thinking of US policymakers on rate cuts after the FOMC's 50-bps rate cut in September, dealers said.
 

Developments in West Asia will also be closely watched, especially their impact on crude prices, dealers said. The swap rate in the one-year segment is seen at 6.40-6.58% and in the five-year segment at 6.10-6.25%.

End

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

Edited by Saji George Titus

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