India IRS Review
Up on rise in US ylds, fading hopes of India Dec rate cut
This story was originally published at 19:57 IST on 21 October 2024
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By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates inched up due to a rise in US Treasury yields and fading hopes of a rate cut in India in December, dealers said. Onshore traders were initially paying fixed rates, with offshore traders joining later in a bid to price in the risk of a slower pace of rate cuts in India and abroad.
The one-year swap rate ended at an over two-month high of 6.54%, against 6.53% on Friday. The five-year swap rate settled at 6.25%, against the previous close of 6.23%, its highest close since Jul. 30.
The five-year OIS rate opened slightly lower as some traders unwound their paid fixed rate positions after a sharp rise in rates on Friday. Domestic traders had paid fixed rates towards the end of trade after Reserve Bank of India Governor Shaktikanta Das said interest rate cuts would be "very premature" and "very, very risky" at this stage. For the market, this dashed hopes of a rate cut in December.
Some traders had held out hope that the RBI's Monetary Policy Committee would cut interest rates in December despite India's CPI inflation for September rising to a nine-month high of 5.49%. The long-awaited rate cut would be the first in India since the onset of the COVID-19 pandemic in 2020.
"As we get to higher (swap) rates, some sort of profit booking will start coming into OIS also," a dealer at a primary dealership said. "Suddenly, you see that no one is trading the six-month rate, and everyone is piling into one-year because that's where the money is right now."
Traders now expect the MPC to begin cutting rates at its February policy review, after the inflation trajectory turns. Rate cuts in the US are also expected at only 50 basis points or less in the rest of 2024, dealers said.
Meanwhile, the yield on the 10-year US Treasury note climbed to 4.14% by the end of Indian market hours on fear of higher government spending in the world's largest economy. This led to a spurt of offshore paying, especially as European market hours began at 1230 IST, dealers said.
"The Democratic campaign seems to be falling apart, and the Republicans seem to be getting into a winning position day by day," a dealer at a foreign bank said, referring to the two major political parties in the US. "So, US yields will be biased towards the upside until the election, as the risk premium is factored in."
OUTLOOK
On Tuesday, OIS rates are seen taking cues from the movement of US Treasury yields and crude oil prices. Swap rates may not rise much further after hitting multi-month highs, dealers said.
In addition, 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%.
| At 1700 IST | FRIDAY |
1-year OIS | 6.54% | 6.53% |
2-year OIS | 6.28% | 6.24% |
5-year OIS | 6.25% | 6.23% |
2-year MIFOR | 6.40-6.52% | 6.38-6.50% |
5-year MIFOR | 6.62-6.74% | 6.59-6.71% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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