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Informist, Wednesday, Oct. 23, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates reversed early gains and ended lower Wednesday as domestic traders unwound their paid fixed rate bets after most contracts hit multi-month highs this week, dealers said. Offshore traders continue to pay fixed rates due to a rise in US Treasury yields, leading to a surge in trade volumes.

The one-year swap rate ended at 6.53%, against 6.55% on Tuesday, while the five-year swap rate settled at 6.23% against 6.26% the previous day. Both contracts ended at over two-month highs on Tuesday.

"On the five-year, 6.275% was a very strong resistance (Tuesday)," a dealer at a primary dealership said. "I think it was mostly non-bank traders, so primary dealers and mutual funds, which may have been covering their paid positions."

OIS rates, particularly that on the five-year contract, had been climbing continuously as offshore cues turned adverse. Hopes of the Reserve Bank of India's Monetary Policy Committee cutting the repo rate at its next meeting in December have faded after India's CPI inflation in September surprised on the higher side, dealers said. RBI Governor Shaktikanta Das' comment on Friday that rate cuts would be "very premature" and "very, very risky" at this stage, further led to rate cuts now being priced largely in February.

Even in such a scenario, domestic traders said OIS rates were lucrative enough to wind up prior paid bets. The one-year swap rate has risen over 15 basis points in October, while the five-year swap is up over 20 bps this month. These traders found willing participants on the other side of the trade from offshore.  

The 10-year benchmark US Treasury note has risen consecutively ever since it crossed the 4% level on Oct. 7, due to uncertainty over the outcome of the US presidential election on Nov. 5. Increasing odds of Republican candidate Donald Trump winning the election could see the 10-year US Treasury yield rise further as his policies may be inflationary and lead to a surge in the US government's borrowing.

The benchmark US yield climbed to a three-month high of 4.24% intraday, before easing to 4.22% by the end of market hours. Recent comments from US Federal Reserve officials have also signalled a modest pace of rate cuts in the future, after a jumbo 50-bps rate cut in September, dealers said.

"There is only one-sided flow from offshore, and that is on the paying side, until the (US presidential) election is done at least," a dealer at a foreign bank said. "There's no scope for offshore guys to receive India rates when it could be the last emerging market to cut rates." 

With the push and pull in rates, trade volumes remained high even ahead of the minutes of the MPC's October meeting, released after market hours. RBI Governor Das is expected to be cautious on inflation, after his comments that rate cuts would be premature and risky at this stage at an event on Friday. Some expect a divergence from RBI Deputy Governor Michael Patra, who may signal that rates are going to align with the central bank's 4% aim in 2025, as he had said in recent speeches.

OUTLOOK

On Thursday, OIS rates are seen taking cues from the movement of US Treasury yields and crude oil prices, dealers said. Domestic traders may continue to receive fixed rates after OIS rates failed to break crucial levels earlier in the week.

Comments on growth and inflation from the minutes of the MPC's October meeting could lend cues to OIS rates, dealers said. Traders initially said there did not seem to be much to change India's interest rate view from the commentary, even though new external member Nagesh Kumar had voted for a 25-bps repo rate cut. The majority of the rate-setting panel held status quo on rates in a 5-1 majority in October, after changing stance to 'neutral' unanimously. 

In addition, developments in the conflict in West Asia are being keenly tracked. The swap rate in the one-year segment is seen at 6.45-6.62% 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 Tanima Banerjee

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