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Informist, Tuesday, Nov. 12, 2024

By Siddhi Chauhan

MUMBAI – Overnight indexed swap rates ended off highs after India's CPI inflation for October was not as high as some traders had feared, despite hitting a 14-month high, dealers said. An intraday rise in US Treasury yields also put upward pressure on swap rates.

The one-year swap rate ended at 6.54%, against 6.53% on Monday. The five-year swap rate settled at 6.27%, against 6.26% the previous trading day.

India's CPI inflation for October, which was released at 1600 IST, rose to 6.21% in October from 5.49% in September, and was above the 5.9% median in an Informist poll of 20 economists. Food inflation accelerated to a 15-month high of 10.87% in October from 9.24% in September. Despite rising above the Reserve Bank of India's medium-term target range of 2-6%, the impact of the data was limited as there was no immediate change in India's rate cut view and a print around 6% was already factored in, dealers said.

"We had actually expected the data to overshoot 6.5%, had this been the case, market would have reacted," a dealer at a primary dealership said. "But this was well below our expectation, so the market did not react that much."

The data has wiped out chances of a rate cut in December, which were already minuscule, dealers said. Traders now look forward to the release of Jul-Sept GDP data at the end of November to gauge the trajectory of rate cuts in India, dealers said. Even with the market expecting growth lower than the RBI's forecast of 7.0%, the odds of a December rate cut are quite slim, dealers said.

However, the consensus market view of a February repo rate cut by 25 basis points to 6.25% remained intact, they said. Some economists--such as those from Capital Economics--have pushed back their rate cut view to April from February.

"Fearing a higher-than-expected India CPI print, some traders paid fixed rates in the OIS market and sold bonds in the gilt market," a dealer at a private bank said. "A higher CPI data for this month would mean delay in rate cuts." This was the last CPI inflation print before the Monetary Policy Committee next meet in December.

Even though the market's focus was mainly on the domestic triggers, traders did not turn a blind eye towards an intraday rise in US yields. The yield on the 10-year US Treasury note closed at 4.36% at 1700 IST against 4.31% on Friday. US bond markets were shut on Monday on account of Veterans Day. Offshore traders paid fixed rates in the five-year swap rate even earlier in the day, while volumes in swaps maturing up to two years were lacklustre, dealers said.

US Treasury yields jumped on Tuesday as investors continued to digest what President-elect Donald Trump's term could mean for interest rates, and awaited the US CPI data for October on Wednesday. Investors abroad have bet on a slower pace of rate cuts in the US, particularly after Trump assumes office in January, due to his proposed policies being seen as inflationary. 

OUTLOOK

On Wednesday, swap rates may open steady on caution ahead of US CPI data, due post market hours. The movement of US Treasury yields and crude oil prices will also be closely watched, dealers said.

The market will await comments by Federal Reserve officials this week, including Fed Chair Jerome Powell's speech on Thursday. The comments will provide guidance on the outlook for US interest rates, which will closely reflect in OIS rates, dealers said.

The swap rate in the one-year segment is seen at 6.43-6.60% and in the five-year segment at 6.20-6.40%.

End

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

Edited by Akul Nishant Akhoury

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