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Informist, Thursday, Dec. 5, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended steady as traders were cautious before the Reserve Bank of India's Monetary Policy Committee meeting outcome Friday, dealers said. 

The one-year swap rate ended at 6.32%, flat against Wednesday's close. The five-year swap rate settled at 6.00%, flat compared to Wednesday. Both swaps traded in a narrow range during the day. 

Ahead of the MPC meeting outcome Friday, most traders have already placed bets on either a 25 basis point repo rate cut or the RBI infusing durable liquidity into the banking system. Measures the central bank could take include a cash reserve cut of up to 50 basis points, or open market bond purchases, dealers said. Hopes of policy easing have soared in the past week after India's GDP growth in Jul-Sept disappointed. India's Jul-Sept GDP growth was at a seven-quarter low of 5.4%, against an Informist poll estimate of 6.5%, and traders' estimates of 6.3%-6.5%.

However, the RBI may find it difficult to cut rates, given that Consumer Price Index-based headline inflation in October was at 6.21%, topping the upper bound of the central bank's target range of 2-6%, dealers said. With inflation still well above the RBI's 4% aim, traders hedged rate cut bets by paying fixed rates in the six-month segment of overnight indexed swaps, dealers said. 

As per data from the Clearing Corp. of India's Rupee Derivatives Dealing System, the total notional volume in the six-month swap was INR 73.00 billion as of 1750 IST, surpassing that of other rates. On Wednesday, the volume in this segment stood at INR 57.25 billion as of 1730 IST, and was one of the least-traded contracts. Traders also said that if the MPC didn't cut rates in December, it would likely cut rates by 25 bps in February and April each. This led traders to bet on those rate cuts through the six-month swap, dealers said.

"If MPC doesn't cut now, in the next two-three meetings we're expecting them to cut at least 50 bps (cumulatively), so traders are placing forward-looking bets," a dealer at a private bank said. 

Swap rates have fallen to psychologically crucial levels which are hard to break without any definitive cues on rate cuts, which kept rates steady during the day, dealers said. Traders realigned portfolios to trim any risk ahead of the outcome, saying that they were going into the outcome neither too light nor heavy on swap contracts. 

"Earlier (in the week) there was some short-covering. But now that, that's done, people don't want to keep any risk, they're adjusting their positions to square off," a dealer at a private bank said. 

OUTLOOK

Friday, swap rates may see a delayed open, before the RBI Governor Shaktikanta Das presents the MPC outcome at 1000 IST. Swaps are likely to open steady as traders may remain cautious. Trade volume may pick up post Das' address, and swaps are expected to rise or fall in a range of 10 basis points, in an upward or downward direction, depending on the outcome. 

Domestic traders will also look out for news on geopolitical tensions, dealers said. The movement of US Treasury yields will also be watched after US initial jobless claims data, but the MPC outcome would be the most significant cue, dealers said. The swap rate in the one-year segment is seen at 6.22-6.42% and in the five-year segment at 5.90-6.10%.

End

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

Edited by Deepshikha Bhardwaj

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