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Informist, Wednesday, Dec. 11, 2024

By Cassandra Carvalho

MUMBAI – Overnight indexed swaps ended higher tracking a rise in US Treasury yields, ahead of US CPI inflation data for November. The newly-appointed RBI Governor Sanjay Malhotra's comments at a press conference in the second half of the trading day had a mild effect on swap rates, dealers said. The one-year swap rate ended at 6.40%, up slightly from 6.38% Tuesday. The five-year swap rate settled at 6.02%, up from 5.99% Monday.

Ahead of the release of US CPI inflation data for November, the yield on the 10-year US Treasury note jumped to 4.24% at 1700 IST, after softening to 4.15% earlier in the week, dealers said. Due at 1900 IST, the CPI data is expected 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 Dow Jones. A reading above consensus estimates could see the Federal Open Market Committee taking a pause instead of cutting the benchmark rate at its meeting next week, dealers said. As of 1720 IST, the CME FedWatch tool showed that Fed fund futures reflected an 86% probability of a 25-basis-point rate cut next week, up from 78% before the latest data showed unemployment in the US had ticked up a bit to 4.2%. 

India CPI inflation data for November is due Thursday, at 1600 IST. Notional trade volumes in swaps were low as traders were cautious ahead of the print. Swap rates have fully priced in a rate cut by the Reserve Bank of India's Monetary Policy Committee in February, which kept an upside rise in swap rates limited, dealers said. However, a higher-than-expected CPI inflation reading could reduce any hope of a rate cut in February, dealers said. An Informist poll estimates the reading at 5.6% and traders estimate a reading between 5.5% and 5.8%.  

RBI Governor Malhotra's comments were largely discounted by swap traders, but sentiment pushed up rates slightly, dealers said. Malhotra said that stability and continuity in monetary policy were very important, leaving traders to infer that Malhotra would likely take his time in pushing for a softer monetary policy.

"Gilts were slightly down today, but OIS had no reaction to Malhotra's press conference, it was very general, there was only reaction from US yields today," a dealer at a private bank said. 

While mutual funds and companies had flocked to the swap rates market Tuesday after the announcement of the new governor, his speech Wednesday dampened spirits as traders were hoping for a more pro-active stance on cutting rates. Even the news that the RBI governor would hold a press conference was largely ignored by the swaps market, as opposed to the gilts market, which saw prices firm up a bit after that announcement.

Tightening liquidity pushed up short-tenure swap rates, even after a 50-basis-point cut in banks' cash reserve ratio last week, translating into an infusion of INR 1.16 trillion into the system. According to data on the RBI's website, the liquidity surplus in the banking system was INR 356.67 billion Tuesday. Dealers said outflows on account of the advance tax and the goods and service tax in the next fortnight would add up to larger sums than the staggered inflows from the cut in the ratio.

"There's some (INR) 200 billion liquidity with us (banks) now, some (INR) 600 will go for tax, so how much is (INR) one trillion really?," a dealer at another private bank said. "Malhotra should have at least said something about introducing more VRRs (variable rate repos to ease liquidity)."

OUTLOOK

Thursday, swap rates will take cues from the movement in US yields after the release of the US CPI data for November, dealers said. Domestic traders will also look out for further news on geopolitical tensions, dealers said. 

Any reaction to global cues may be offset by caution ahead of India's CPI inflation data for November, due during market hours Thursday. The swap rate in the one-year segment is seen at 6.30-6.50% 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 Akul Nishant Akhoury

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