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Informist, Friday, Oct. 18, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates shot up to multi-month highs after Reserve Bank of India Governor Shaktikanta Das said it will be risky and premature to cut rates. Traders paid fixed rates as they repriced hopes of the central bank's Monetary Policy Committee cutting rates in December, dealers said.

The one-year swap rate ended at 6.53% against 6.48% Thursday, hitting its highest level since Aug. 16 during the day. The five-year swap rate settled at 6.23%, against the previous close of 6.15%, its highest close since Jul. 30.

"A rate cut at this stage will be very premature and can be very, very risky," Das said at the Bloomberg India Credit Forum on Friday. "When your inflation is 5.5%, and the next print is also expected to be high, you can't be cutting rates at that point – more so if your growth is also doing well."

India's CPI inflation in September rose to a nine-month high of 5.49% from 3.65% in August. Das said he expects another high reading in October, before inflation moderates in Nov-Dec. The rise in retail food prices so far this month indicates that headline print for October might drift closer to 6%, IDFC FIRST Bank said in a research report on Tuesday.

"The knee-jerk reaction was because everyone just turned to the paying side after (the RBI governor) said what he said," a dealer at a private bank said. "It was not a considered movement, but now December (rate cut) looks to be bleak. I think February is still a long way away, and I don't think the new MPC would delay beyond that."

Last week, the newly-constituted MPC unanimously softened its policy stance to 'neutral' from 'withdrawal of accommodation'. Before this meeting, the government appointed three external members to the rate-setting panel. Nagesh Kumar, director and chief executive of the Institute for Studies in Industrial Development, voted for a 25-basis-point rate cut in his first meeting. The rest of the committee, headed by RBI Governor Das, voted to keep the repo rate unchanged at 6.50%.

Both trade volumes and OIS rates surged only near the end of trade, after the governor's comments. For the rest of the day, swap rates were up slightly due to an overnight rise in US Treasury yields. US data released after Indian market hours Thursday indicated a resilient economy, lowering hopes of rates cuts in the rest of 2024.

US retail sales for September grew 0.4% on month, against 0.3% estimated by Dow Jones. Initial jobless claims in the US for the week ended Saturday were at 241,000, lower than 259,000 expected. At 2000 IST, the probability of a status quo by the US Federal Open Market Committee in November was 9.1%, with the majority still expecting a 25-bps rate cut.

"The five-year OIS going up has mostly been led by offshore, but some domestic banks have also turned to the paying side as global cues are not getting any better now for an extended duration," a dealer at a foreign bank said.

OUTLOOK

OIS rates are not traded on Saturday. On Monday, OIS rates are seen taking cues from the movement of US Treasury yields and crude oil prices. The evolution of domestic rate cut expectations after RBI Governor Das' comments on Friday may also lead to a further movement in OIS rates, dealers said.

In addition, the developments in the conflict in West Asia will be keenly tracked. The swap rate in the one-year segment is seen at 6.40-6.55% and in the five-year segment at 6.05-6.25%.

End

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

Edited by Vidhi Verma

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