Informist, Monday, Jun 12, 2023
By Aaryan Khanna
MUMBAI – Overnight indexed swap rates ended little changed ahead of the India CPI inflation print for May, though a surge in trade volumes suggested a divided rate view, dealers said.
The one-year swap rate ended at 6.62%, against 6.63% on Friday, while the five-year swap rate ended at 6.15%, against 6.16% the previous trading day.
An Informist poll of 18 economists had estimated CPI inflation would cool to 4.4% in May from 4.7% in April, which traders had bet on during the day. In data released after market hours, the headline CPI inflation printed at 4.25%.
Despite the fall in headline inflation, rate cuts are unlikely soon after comments by Reserve Bank of India officials refocused its medium-term inflation target of 4% rather than the comfort band of 200 basis points on either side, dealers said.
The durable need for inflation to remain near the target has pushed hopes of a rate cut further to February monetary policy review. Earlier, some traders had bet on a moderation in headline interest rates as early as October, dealers said.
With rate cuts unlikely in the calendar year, it was appropriate for traders to pay fixed rates in the one-year swap beyond 6.60%, dealers said.
On the other hand, some traders unwound their fixed rate bets, preventing the one-year OIS rate to rise to the psychologically crucial 6.65% level, dealers said.
"There has been two-way trade in the 1-year swap, there is a lot of interest since 6.65% didn't break, which means there was some scope of retracement and exiting the position before CPI," a dealer at a private bank said.
Meanwhile, the five-year OIS rate was steady through the day due to a lack of significant cues, dealers said. The movement in US Treasury yields was subdued ahead of the US CPI inflation print for May, as well as the Federal Open Market Committee's rate decision on Wednesday, dealers said.
Nearly three-quarters of Fed funds rate traders see a pause at the meeting, with the remainder betting on a 25-basis-point rate increase, according to the CME FedWatch tool. This would be the first time the Fed panel does not hike rates since March 2022.
However, the US Federal Reserve is expected to continue with monetary policy tightening and suggest rate may be higher for long, dealers said.
"Most of it was receiving on the technical front, broadly from the domestic side," a dealer at a primary dealership said. "Offshore activity has been muted today because people are sitting tight for FOMC."
OUTLOOK
On Tuesday, swap rates are seen opening slightly lower after CPI inflation for May was lower than the market expected, dealers said.
The fall will be limited by the view that domestic rate cuts are unlikely to be moved closer because of the print, dealers said.
Traders will watch out for any sharp movement in US Treasury yields and crude oil prices at open.
The swap rate in the one-year segment is seen at 6.60-6.75%, and the five-year at 6.00-6.25%.
| At 1700 IST | Friday |
1-year OIS | 6.62% | 6.63% |
2-year OIS | 6.31% | 6.33% |
5-year OIS | 6.15% | 6.16% |
2-year MIFOR | 6.72-6.84% | 6.71-6.83% |
5-year MIFOR | 6.73-6.85% | 6.73-6.85% |
End
Edited by Deepshikha Bhardwaj
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