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Informist, Monday, Dec. 2, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates slumped for the second straight day after the sharply lower GDP growth for Jul-Sept raised hopes of a repo rate cut by the Reserve Bank of India's Monetary Policy Committee on Friday. The swap rates, especially the one-year, fell to multi-year lows as traders are more optimistic about a 25-basis-point cut in repo rate after the GDP data, dealers said.

The one-year swap rate ended at 6.32% against 6.36% on Friday, its lowest since Sept. 13, 2022. The five-year swap rate settled at 6.01% compared to 6.04% on Friday, the lowest in over two months.   

India's Jul-Sept GDP growth slowed to a seven-quarter low of 5.4%, well below the RBI's forecast of 7.0%. An Informist poll estimated the print at 6.5%. With the shocker on the GDP data, dealers said the MPC might bring forward rate cuts to December from the market's earlier expectation of February. The outcome of the three-day meeting beginning Wednesday, will be announced on Friday. A high CPI inflation reading for October had dashed any hopes of a December rate cut earlier.

"OIS is the front-runner, it's always the first indicator on rate cuts. There will be a 25 bps cut, but some liquidity measures will increase, the VRR (variable rate repo) etc," a dealer at a private bank said, referring to the tenure of the central bank's temporary liquidity injections. 

At the MPC's previous meeting in October, only external member Nagesh Kumar had voted in favour of a rate cut, with the five others voting for a status quo on rates. The MPC had, however, unanimously voted in October to soften its stance to 'neutral' from 'withdrawal of accommodation' after over two years. While swaps traders were optimistic of a repo rate cut on Friday, other money market traders were expecting a cut in the cash reserve ratio, or other measures to ensure comfortable liquidity in line with the modified stance. The cash reserve rato ratio currently stands at 4.50%, and traders expect a cut of up to 50 bps this week, back to its pre-COVID level.

"A 70% probability of a 25 bps cut at the MPC's December meeting is priced in... no one wants to be on the paying side today, everyone is receiving," a dealer at another private bank said. 

The large notional volumes in swaps during the day were largely on account of domestic traders, with some amounts of foreign inflows, dealers said. Some corporate entities may also have received fixed rates during the day, as they locked in the higher yields ahead of a possible rate cut.  

Towards the market close, some traders paid fixed rates as the 10-year US Treasury yield rose intraday to return to 4.21%, its level at the time of the Indian market open on Monday. Some traders expect swap rates to soften during the week, as the 10-year US yields have eased from near 4.50% in November. But several key data points and commentary from US Federal Reserve officials are due this week, making further bets on US yields easing risky, dealers said.

OUTLOOK

On Tuesday, swap rates may open lower as traders may continue to bet on hopes of a rate cut by the MPC this week, dealers said. The fall may be limited after the one-year swap rate hit an over two-year low, as traders may avoid large bets when the three-day policy meeting begins Wednesday.

Domestic traders will also look out for further news on geopolitical tensions, dealers said. The movement of US yields will also be closely watched, dealers said. 

The swap rate in the one-year segment is seen at 6.27-6.37% and in the five-year segment at 5.96-6.06%.

End

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

Edited by Saji George Titus

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