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Informist, Wednesday, Oct. 9, 2024

By Siddhi Chauhan

MUMBAI – The one-year swap rate ended lower after the Reserve Bank of India's Monetary Policy Committee changed its stance to neutral, a week after such expectations had largely faded from the market, dealers said. The five-year swap rate ended off lows.

The one-year swap rate ended at 6.40% against 6.46% on Tuesday, after hitting 6.36% during the day, its lowest level since Sept. 26. The five-year swap rate settled at 6.12%, against the previous close of 6.14%. The five-year rate had slumped to as low as 6.06%.

At its meeting, the MPC unanimously changed its stance to 'neutral' from 'withdrawal of accommodation', the first time since June 2022. The MPC did so as the earlier stance had served its purpose, RBI Governor Shaktikanta Das said. The panel, however, left the repo rate unchanged at 6.50% for the tenth consecutive meeting.  

Despite a change in stance, overnight money market rates are expected to remain unaffected, dealers said. "Nothing much has changed on the liquidity front, their (RBI's) comfortable band is expected to remain the same, which is between 6.25% to 6.50%," a dealer at a private bank said. "This is because adjustment in banking system liquidity had already taken place with the flush of liquidity into the banking system." 

Liquidity has been in a substantial surplus since July on account of government spending. Since then, the central bank has been conducting variable rate repo and variable rate reverse repo auctions when required. A similar practice is expected to continue going forward, Das said. 
 

Bets of a stance change vote by the RBI members on the committee dwindled after Iran launched missiles on Israel last week, and the accompanying rise in crude oil prices, dealers said. Fears of supply disruptions led Brent crude for December delivery to surge above $80 a barrel, the highest levels since August. 

However, the fall in OIS rates was limited as the 10-year US Treasury yield remained above 4% after recent jobs data suggested a slower pace of monetary policy easing in the US, dealers said. This had a larger impact on the five-year swap rates, which ended little changed from the previous close. 

"All of us were expecting a stance change, but the swaps have only fallen by 6 basis points, the fall should have been more than 10 bps. There is still more room for a fall in the six-month contract," a dealer at a private bank said. "The fall is not convincing because OIS is still hanging on a rise in US yields."

The reaction to the MPC's change in stance was also limited as it was factored in by a majority of market participants. Even before the monetary policy outcome, the domestic one-year swap rate had priced in a high chance of a 25-bp rate cut in December, dealers said. Rate cut expectations in India had firmed up as the US Federal Open Market Committee began its rate-cutting cycle with an aggressive 50-bp rate cut in September.

OUTLOOK

OIS rates may take cues from the movement in US Treasury yields after the minutes of the US FOMC's September meeting, due to be released at 2330 IST, dealers said. The minutes will hold significance as they will offer insight into the thinking of US policymakers on rate cuts after the FOMC's 50-bp rate cut in September.

Traders also look ahead to US September CPI data on Thursday. The consumer price index for September is forecast to have risen 0.1% on a monthly basis, after rising 0.2% in August, according to Dow Jones. Core CPI is expected to have risen 0.2% in September, after rising 0.3% in August.

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 Avishek Dutta

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