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Informist, Tuesday, Dec. 3, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended largely unchanged as traders were cautious ahead of the Monetary Policy Committee meeting outcome on Friday, dealers said. Some traders paid fixed rates in longer-term swaps and received fixed rates in short-term swaps on expectations of policy accommodation in the form of a repo rate cut or liquidity-easing measures by the Reserve Bank of India. 

The one-year swap rate ended at 6.33% against 6.32% on Monday. The five-year swap rate settled at 6.02% compared to 6.01% on Monday. Both swaps traded within a narrow range of 5 basis points during the day. 
 

Swap rates opened lower tracking a slight overnight fall in US Treasury yields coupled with hopes of a rate cut by the RBI on Friday due to the weaker-than-expected GDP print for Jul-Sept. Some traders expect a 25 basis point rate cut this week after Jul-Sept GDP growth printed at 5.4%, sharply lower than estimates of 6.3%-6.5%. However, traders were wary of pricing in repo rate cuts beyond two reductions of 25 bps each by April, dealers said.

Most traders were confident of a cut of up to 50 bps in the cash reserve ratio, which is currently at 4.50%, a move that would take the reserve ratio back to its pre-COVID level. Other options the RBI could choose to infuse liquidity in the banking system were variable rate repos or purchase of gilts through open market operations. Dealers said OMO seemed unlikely as it would further skew the demand-supply balance of gilts, which is already towards excess demand due to the inclusion of Indian gilts in global bond indices. Dealers were also optimistic of a softer tone in the monetary policy statement, irrespective of a cash reserve ratio or repo cut. 

"A CRR (cash reserve ratio) cut is fully priced in by the (swaps) market, I'm hoping for a dovish tone and a CRR cut... there's been such a major event (Jul-Sept GDP growth data) and we're almost 15 bps down," a dealer at a private bank said. 

With the possibility of a December rate cut, the OIS curve steepened as traders paid fixed rates in the five-year segment and received in the one-year tenure, dealers said. As for the non-deliverable OIS segment, Tuesday's rates were in line with swap rates on the Clearing Corp. of India's Rupee Derivatives Dealing System (ASTROID) platform.

"Now the 5.90% and 6.03% levels (of the five-year swap) are the technical levels which are hard to break until the MPC (outcome) I feel... yesterday (Monday) the NDF (non-deliverable forward) segment 5-year fell to 5.90% also," a dealer at another private bank said.

The yield on the 10-year Treasury note fell to 4.20% at 0900 IST from 4.22% at Monday's Indian market close. US yields softened following US Federal Reserve Governor Christopher Waller’s comments saying he may vote for a rate cut in December, but would wait for the slew of economic data, due before the meeting, to decide if rates needed to be steady.

The Federal Open Market Committee will meet on Dec. 17-18.

Swaps traders said the trajectory of rate cuts in the US was relatively more predictable, ever since the first cut of the cycle in September. The MPC's upcoming rate decision would be the most significant cue for swap traders this week, despite US jobs data and speeches by Fed officials lined up.  

OUTLOOK

On Wednesday, swap rates may open lower as traders may continue to bet on a rate cut by the MPC this week, dealers said. The fall may be limited as swap rates have hit key technical levels which may be hard to break, as traders may avoid large bets when the three-day policy meeting begins.

Domestic traders will also look out for further news on geopolitical tensions, dealers said. The movement of US Treasury yields will also be closely watched post the release of the US Oct job openings and labor turnover survey due at 2030 IST, dealers said. Comments of Federal Reserve officials Austan Goolsbee and Adriana Kugler may lend cues to the overnight movement of US yields.  

The swap rate in the one-year segment is seen at 6.28-6.38% and in the five-year segment at 5.97-6.07%.

End

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

Edited by Saji George Titus

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