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Informist, Tuesday, Dec. 10, 2024

By Srijita Bose

MUMBAI – Overnight indexed swap rates ended lower after the government appointed Revenue Secretary Sanjay Malhotra as the new governor of the Reserve Bank of India for three years starting Wednesday. Traders placed fresh bets on a February repo rate cut by the Monetary Policy Committee with Malhotra heading the panel, dealers said. 

The one-year swap rate ended at 6.38%, against 6.40% on Monday. The five-year swap rate settled at 5.99%, compared to 6.02% on Monday.

The appointment, after market hours Monday, came after two weeks of intense speculation in the market, with traders split between an extension for outgoing governor Shaktikanta Das and the announcement of a new governor. As the announcement was delayed to near the end of Das' term on Tuesday, dealers had broadly switched their expectations to the fact that the government would replace Das after six years at the helm.

Malhotra, who will become the new head of the RBI's Monetary Policy Committee, is seen as more amenable to supporting the government's growth agenda by lowering interest rates. Traders priced in a 50-basis-point rate cut by the MPC in the next 12 months with Malhotra at the helm, and reflected the chance of another decrease. The one-year swap rate had priced in nearly 75 bps of repo rate cuts, before being jolted upward by Das' optimistic commentary on growth after the outcome of the MPC meeting on Friday.

"The government has played their cards right and placed a person from the North Block as the (RBI) governor who will definitely be more pro rate cut and push their growth target," a dealer from a primary dealership said. "The rates right now show almost three rate cuts priced in the OIS, and offshore receiving interest also came in at these levels in the morning."

Offshore traders received fixed rates on optimism on the rate cut in February, dealers said. As the day progressed, however, interest on paying fixed rates also came in as the yield on the 10-year US Treasury note inched up, they said.

The yield on the 10-year US Treasury note rose to 4.23% at 1700 IST from 4.17% on Monday. Investors were also watchful ahead of US CPI data for November, set to be released on Wednesday. If CPI inflation rises as expected, investors globally may take the view that the US Federal Reserve may not cut rates in 2025, pushing up US yields, dealers said.

At the day's low, some traders paid fixed rates because their terminal repo rate was still 6.00% in 2025, despite a February rate cut, dealers said. Expectation of India's CPI inflation for November being higher than the consensus estimate polled by Informist at 5.6%, also led to some caution among traders, they said. The CPI inflation for October was at 6.21%, above the 2-6% comfort band of RBI.

"The market has already priced in three rate cuts but even Malhotra cannot do anything if inflation continues to be on the upside and is more than 6.0%," a dealer at a private bank said. "In this case, there will be a shallower rate cut than what the market has priced in, which is why some reversal is happening."

Meanwhile, trade volumes in the one-month OIS spiked to INR 79 billion on the Clearing Corp. of India's Anonymous System for Trading in Rupee OTC Interest-Rate Derivatives. Dealers speculated activity from a corporate house as all 31 trades in the paper were settled at 6.63%.

OUTLOOK

On Wednesday, swap rates will take cues from the movement of US yields before the US CPI data is released post market hours, dealers said. Domestic traders will also look out for further news on geopolitical tensions, dealers said. 

The US CPI data for the month of November is anticipated to show a rise in annual headline inflation to 2.7% from 2.6%, while core CPI is expected to remain steady at 3.3%, according to a poll by FX Street. The swap rate in the one-year segment is seen at 6.32-6.42% and in the five-year segment at 5.93-6.08%.

End

Edited by Deepshikha Bhardwaj

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