India IRS Review
Steady; volumes remain low before US presidential election
This story was originally published at 19:47 IST on 5 November 2024
Register to read our real-time news.Informist, Tuesday, Nov. 5, 2024
By Cassandra Carvalho
MUMBAI – Overnight indexed swap rates were little changed ahead of the US presidential election. Caution on rate bets before a winner is declared after the vote counting, expected early Wednesday in India, kept the total notional volumes low, dealers said.
The one-year swap rate ended at 6.55%, against 6.54% on Monday. The five-year swap rate settled at 6.30%, against 6.29% the previous trading day.
Shorter-term swaps such as the one-month and two-month contracts fell by 1-2 basis points as liquidity conditions eased. The liquidity surplus in the banking system rose to INR 2.76 trillion, its highest since Oct. 4. Inflows from redemption and coupon of the 6.18%, 2024 gilt on Monday, worth nearly INR 800 billion aided liquidity, and with no major outflows for the next fortnight, dealers said. This is likely to keep the overnight Mumbai Interbank Offer Rate – the fixed leg of the OIS contract –in check near the policy repo rate of 6.50%.
Offshore activity was muted ahead of the US election, and because the 10-year US Treasury yield remained largely steady at around 4.30%, dealers said. The lack of domestic cues kept both domestic and offshore traders out of the swap market. The US presidential election may also impact the Reserve Bank of India's Monetary Policy Committee's decision on interest rate cuts, dealers said.
The rate-setting panel could also delay or opt out of rate cuts in the medium term if the US Federal Open Market Committee maintains a higher terminal interest rate due to an inflationary fiscal situation in the US. This is seen in the case of both Republican candidate Donald Trump and Democrat Kamala Harris winning the poll, though Trump is seen more profligate. As for India, traders do not expect a rate cut in December, after recent geopolitical tensions in West Asia and high inflation in India.
"There's no rate cuts in MPC, no softness in GDP growth, and the chances of a February rate cut are not fully priced in, so other than (US) elections there's nothing else to base a view on," a dealer at a private bank said.
Media polls show neck-to-neck competition between the two US candidates. Trump's policies are seen pushing up US Treasury yields over the medium term, while dealers expect foreign inflows into emerging markets to resume if Harris wins the election.
"Tomorrow (Wednesday) we'll see good (varied) rates in OIS, the election outcome will likely bring in (foreign) inflows if Kamala (Harris) wins," a dealer at another private bank said. OIS rates are seen volatile Wednesday as vote counts continue in the US, particularly if the election is too close to call immediately, dealers said.
OUTLOOK
On Wednesday, the movement of US Treasury yields and the voting trend in the US presidential election may lend cues to swap rates, dealers said. Traders await US Federal Reserve Chair Jerome Powell's commentary at the US Federal Open Market Committee's outcome later this week, with any comments on the future trajectory of interest rates after the US election keenly eyed.
A 25-bps rate cut by the FOMC has largely been priced in to swap rates, dealers said. Traders did not pay fixed rates ahead of the US election but kept a wary eye on crude oil prices, after Brent crude for January delivery topped $75 a barrel Tuesday.
In addition, traders may take cues from developments in the conflict in West Asia. The swap rate in the one-year segment is seen at 6.50-6.60% and in the five-year segment at 6.25-6.35%.
| At 1700 IST | THURSDAY |
1-year OIS | 6.55% | 6.54% |
2-year OIS | 6.31% | 6.31% |
5-year OIS | 6.30% | 6.29% |
2-year MIFOR | 6.54-6.66% | 6.53-6.65% |
5-year MIFOR | 6.75-6.87% | 6.74-6.86% |
End
US$1 = INR 84.11
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Tanima Banerjee
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