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Informist, Thursday, Oct. 10, 2024

By Aaryan Khanna 

MUMBAI – Overnight indexed swap rates ended higher due to a rise in US Treasury yields after the minutes of the Federal Open Market Committee's last meeting and before the US CPI data for September, dealers said. Offshore traders are likely to have paid fixed rates through the day. 

The one-year swap rate ended at 6.42% against 6.40% on Wednesday. The five-year swap rate settled at 6.16%, against the previous close of 6.12%.

"(Offshore) Non-deliverable OIS rates are always higher than onshore these days," a dealer at a primary dealership said. "So, offshore traders are now consistently on the paying side, and that is having an impact on (OIS) rates."

The yield on the 10-year US Treasury note rose to 4.10% at the end of Indian market hours on Thursday from 4.04% on Wednesday. Minutes of the US Federal Open Market Committee's September meeting on Wednesday did not suggest any urgency in bringing US interest rates lower, despite the panel kicking off its rate-cut cycle with a 50-basis-point cut. If the US slows down its pace of cutting policy rates, the MPC might also avoid rate cuts in December, dealers said.

"Given that the US economy appears to be showing firmer signs of a 'soft landing' and the labour market indicators have improved since the last policy meeting, the case for 25-bps cut in November and 25-bps cut in December have increased, that remains our base-case expectation," economists at ICICI Bank wrote in a note Thursday.

Falling inflation could be the next impetus for betting on further aggressive US rate cuts after labour market data released last week cooled those hopes. According to Dow Jones, US CPI likely rose 0.1% on month in September, against 0.2% in August. Core CPI is was expected to have risen 0.2% in September, after rising 0.3% in August. Data released after market hours showed both headline and core CPI were a tad higher than expected.

On the domestic front, dealers said the change in stance by the Reserve Bank of India's Monetary Policy Committee was already priced in after Wednesday. The MPC softened its stance to 'neutral' from 'withdrawal of accommodation' on Wednesday. The rate cut vote by new external member Nagesh Kumar was a pleasant surprise to some dealers, even as the committee voted to keep the repo rate unchanged at 6.50% for the tenth straight meeting. Others said that Reserve Bank of India officials seemed less concerned about near-term risks to inflation, which could open the door to rate cuts in the near future.

However, with a part of the stance saying the committee would be "unambiguously" focused on bringing CPI inflation back to the target of 4%, some traders were unconvinced that the stance change was meaningful for India's rates trajectory. The one-year swap is pricing in 50 bps of repo rate cuts starting in December and ending by April at most.

"I agree with the majority view that the rate cuts are coming in December. But there's a risk that they (the MPC) are content with changing the stance to 'neutral' and then holding it here for several policies, before going for a rate cut," a dealer at a foreign bank said.

OUTLOOK

OIS rates may take cues from the movement in US Treasury yields after the release of mixed inflation and labour market data after market hours, dealers said. The data showed US headline CPI rose 0.2% on month in September, while core CPI – which excludes food and energy costs – rose 0.3% on month. Both figures matched the rise seen in August, but were each marginally higher than estimated by Dow Jones.

Developments in West Asia are also 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% on Friday 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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