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Informist, Monday, Oct. 14, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended little changed amid muted trade volumes Monday on caution ahead of India's CPI data for September, dealers said. Activity from offshore traders was muted because of market holidays in Japan and the US.

The one-year swap rate ended at 6.45% against 6.44% Friday. The five-year swap rate settled at 6.18%, against the previous close of 6.17%.

An Informist Poll saw headline CPI inflation at 5.1% in September against 3.65% in August, due to an unfavourable base effect. However, dealers said the market may disregard the headline print and look to the sequential inflationary pressures to better gauge the direction of monetary policy in India. Last week, the Reserve Bank of India's Monetary Policy Committee softened its policy stance to 'neutral' from 'withdrawal of accommodation', and the market anticipated a repo rate cut by 25 basis points in December.

Some traders did expect the reading to be higher than the market's view of 4.8-5.2%, and paid fixed rates towards the end of trade, dealers said. But traders' biggest concern was that the inflation reading may delay India's rate-cutting cycle, with inflation well above the RBI's 4% target, they said. RBI Governor Shaktikanta Das has guided for inflation to remain high in the near term, saying he expected both the September and October prints to be above 5%. The October CPI print would be the last one before the MPC makes its next interest rate decision in December.

"The market's ready for 5% inflation, but the impact will only really be seen tomorrow (Tuesday)," a dealer at a foreign bank said. "Everyone tries to price in the data, but well, the impact on monetary policy will be looked at after all the internals are out."

In data released at 1730 IST, India's CPI inflation rose to 5.49% on year in September, higher than consensus estimates. Headline consumer inflation in September was the highest in nine months. CPI inflation for Jul-Sept averaged 4.2%, against the RBI's latest projection of 4.1%.

Traders also said the comments from Das Wednesday marked a pivot in monetary policy, even as the RBI governor refused to label the pause as one, leaving it to the market to interpret. While near-term inflation pressures in India are likely to remain high, the governor's comments that food inflation is likely to cool after Oct-Dec suggest comfort in easing policy in the future, dealers said. The one-year swap rate prices in 50 basis points of repo rate cuts to 6.00% between December and June, they said.

Volumes in the five-year OIS contract were the lowest in a month due to the muted offshore activity. The contract traded in a narrow band and its volumes were only INR 35.40 billion on the Clearing Corp. of India Ltd.'s Anonymous System for Trading in Rupee OTC Interest-Rate Derivatives, the lowest since Sep. 16.

"Offshore paying has been constant over the past few weeks," a dealer at another foreign bank said. "I think that has fallen off completely today (Monday), which is why you see such a low."

OUTLOOK

OIS rates may rise Tuesday as the higher-than-expected CPI inflation print for September may push rate-cut hopes further back from December, which the market had been pricing in, dealers said.

India's CPI inflation rose to 5.5% in September, against 5.1% expected in an Informist Poll. CPI inflation for Jul-Sept averaged 4.2%, against the RBI's latest projection of 4.1%. Kotak Mahindra Bank pushed back its call on the first repo-rate cut to February from December earlier, after the data.

Movement in US Treasury yields and crude oil prices, as well as developments in West Asia, may also lend cues. The swap rate in the one-year segment is seen at 6.40-6.55% and in the five-year segment at 6.12-6.30%.

End

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

Edited by Rajeev Pai

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