Informist, Tuesday, Dec 5, 2023

By Nishat Anjum

MUMBAI – Overnight indexed swap rates ended lower as traders unwound their paid bets on caution ahead of the Reserve Bank of India's Monetary Policy Committee's three-day meeting, starting Wednesday, dealers said. Some traders received fixed rates during the day, tracking a fall in US Treasury yields.

The one-year swap rate settled at 6.85%, against 6.87% on Monday. The five-year swap rate ended at 6.46%, compared with 6.50% the previous day.

"There must be some cut-losses in paid positions of mutual funds around 6.45% (in five-year swaps), so they would be unwinding there," a dealer at a private bank said. "Maybe globally the rate view is eased, but with strong data back home, the policy is likely to be hawkish."

Meanwhile, the market is unanimous that the domestic rate-setting panel will keep the policy repo rate and policy stance unchanged for a fifth consecutive time at the outcome of its meeting on Friday, even though higher food prices pose an upside risk to inflation. All 25 respondents in an Informist poll of economists, treasury heads, and analysts expect the rate-setting panel to keep the repo rate unchanged at 6.50% and maintain the 'withdrawal of accommodation' stance at the end of its three-day meeting.

Even as the market expects the upcoming policy meeting to largely be a non-event, it remained cautious due to liquidity-related surprises at the last two meetings, dealers said. Tight liquidity conditions weigh on the short-term swap rates.

In the October policy, RBI Governor Shaktikanta Das said the central bank was considering open market operation sale auctions to drain liquidity. In the August policy, the central bank had imposed a 10% incremental cash reserve ratio on an increase in scheduled banks' net demand and time liabilities between May 19 and Jul 28.

Meanwhile, yield on the benchmark 10-year US Treasury note fell to 4.23%, as against 4.25% at the time of the Indian market close on Monday. US Treasury yields fell in European trade as investors awaited jobs data that could provide hints about the state of the economy and the impact of restrictive Federal Reserve monetary policy.

Non-farm payroll data for November, due to be released on Friday, is expected to show the US economy added 180,000 jobs last month, up from 150,000 in October.

"Even if the market is expecting a rate cut in the US, I don't think it would be possible in March," a dealer at another private bank said. "Jobs data is due, and given the US yields movement is sharp after unexpected data, it is too early to factor in rate cuts." According to the CME's FedWatch tool, US rate futures on Friday priced in a 54.2% chance of a rate cut by the March meeting.

OUTLOOK

On Wednesday, swap rates are seen steady as traders remain cautious ahead of the Monetary Policy Committee's three-day meeting, ending Friday.

A sharp move in US Treasury yields and crude oil prices may also lend cues at the opening.

The swap rate in the one-year segment is seen at 6.78-7.00%, and in the five-year segment at 6.40-6.60%.

End

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

Edited by Manisha Baxla

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