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Informist, Friday, Dec. 6, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended sharply higher on Friday as the Reserve Bank of India's Monetary Policy Committee left the repo rate unchanged at 6.50% for the 11th straight meeting, dealers said. Short-term OIS rates had priced in a 25-basis-point repo rate cut, even as the consensus estimate in an Informist poll was a status quo.

The one-year swap rate ended at 6.44% against 6.32% at Thursday's close, jumping the joint-most since Feb. 8, 2023. The five-year swap rate settled at 6.08% compared to 6.00% Thursday, up the joint-most since Oct. 18.  

Traders had expected a softer tone on monetary policy by the MPC, with a shift of focus to supporting growth from bringing down inflation. The one- and five-year swap rates had fallen to multi-year lows earlier this week as traders brought forward their rate cut expectations, after India's GDP growth in Jul-Sept was sharply lower than expected. On the contrary, RBI Governor Shaktikanta Das said that the economy was resilient, and dealers said that the policy tone suggested rate cuts were not a given even in February.

"Das didn't give any hint of near-term (rate cut guidance), and he has hiked inflation forecasts. He's still cautious, so everyone is paying (fixed rates)," a trader at a primary dealership said. 

The RBI's move to cut the cash reserve ratio by 50 bps to 4.00% of banks' net demand and time liabilities helped cap the rise, but would have had limited impact overall on swap rates, dealers said. Das said the cash requirement would be modified in two equal tranches of 25 bps each with effect from the fortnight beginning Dec. 14 and Dec. 28. The RBI had raised the cash reserve ratio when the MPC began tightening monetary policy in 2022.

Instead of the overnight Mumbai Interbank Offer Rate – the floating leg of the OIS contract – moving to 6.25% as expected, the cash reserve ratio cut would only anchor it to near 6.50%, with potential and sporadic spikes, dealers said. A fall below 6.50% was unlikely in December due to constant outflows scheduled in the form of tax outflows. Even in January, strains on liquidity would continue due to increased currency in circulation, making it unlikely that the overnight MIBOR rate is consistently set below 6.25% for the next two months, dealers said.

"We're going to have around INR 1.16 trillion of liquidity soon. So that's a plus for swaps, but because it's in a staggered manner, traders are bearish on short-term (swap rates)," a dealer at a private bank said.

Swap rates maturing below one year jumped up by 11-16 bps, on fears of tight near-term liquidity and with the repo rate being unchanged. The six-month swap rate jumped to 6.54% from 6.43% Thursday. This was after the six-month swap rate was the largest traded contract Thursday, as traders bet on a 25 bps rate cut in February and in April, dealers said. After the MPC outcome, dealers said that while a rate cut in February was still possible, geopolitical cues then could further spike inflation, pausing the rate cut cycle in India.

"February rate cut chances are definitely there, but in January (US president-elect Donald) Trump will come to power. So there could be some effect of his tariffs on Treasuries (US Treasury yields). If US yields are up, then our yields will also have to move upwards," a dealer at another private bank said. 

OUTLOOK

Swaps are not traded Saturday. On Monday, swap rates may take cues from the movement of US Treasury yields after the US November employment report at 1900 IST. US yields may also take cues from the comments of US Federal Reserve Bank of Cleveland President Beth Hammack.

Any news on the extension of tenure of Das or his successor will also lend cues to swaps. Das' term is set to end on Tuesday, and most traders expect an extension of his tenure. However, any other candidate appointed for the position may have a softer stance on easing monetary policy which would be good news for traders, dealers said.

Domestic traders will also look out for global developments over the weekend, dealers said. The movement of crude oil prices will also be tracked, dealers said. The swap rate in the one-year segment is seen at 6.40-6.48% and in the five-year segment at 6.04-6.12%.

End

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

Edited by Ashish Shirke

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