Informist, Friday, Feb 23, 2024

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended largely unchanged today as the minutes of the Monetary Policy Committee's Feb 6-8 meeting failed to lend cues on India's interest rate trajectory going ahead, dealers said. Some traders paid fixed rates in the five-year swap noting a small rise in US Treasury yields.

The one-year swap rate settled at 6.73%, as against 6.72% on Thursday. The five-year swap rate ended at 6.36%, against 6.34% on the previous trading day. The movement in the short-term swap rates was limited, as it has been over the past week, as there have been no fresh cues on the trajectory of domestic interest rates even from the minutes released after market hours on Thursday, dealers said.

Members of the Monetary Policy Committee drew comfort from resilient growth, which outperformed their expectations, in holding the policy repo rate at 6.50% and maintaining the policy stance at "withdrawal of accommodation" in their Feb 6-8 meeting, the minutes showed. Several members cheered the core inflation print, as the metric, which strips out volatile components like food and fuel, fell below the 4% mark for the first time in four years in December. But the panel still remained cautious of food inflation pressures, and the majority was in favour of holding rates to gauge further economic impacts of past rate hikes.

External member Jayanth Varma, the lone dissenter on the status quo, had voted for a rate cut--the first such vote since May 2020. The real policy repo rate of 2% as calculated by Varma was the nominal policy rate over projected inflation in 2024-25 (Apr-Mar), which the RBI projected to average 4.5% for the full year.

"I do not believe that such a high real rate is required at this stage to drive inflation down to the target of 4%," Varma said in his minutes. "It is true that economic growth is holding up well, but there is no evidence at all that the economy is overheating."

External member Ashima Goyal also acknowledged that the RBI's CPI inflation projection for 2024-25 gave room to cut rates, but others said such a move would be premature. The comments of the members echoed their views in past meetings, dealers said.

"There were no takeaways from the minutes, nothing has changed," a dealer at a private bank said. "Gone are the days when it used to have an impact, now we barely expect an extra word, never mind direction."

On the global front, US Treasury yields rose as weekly initial unemployment claims were lower than expected, which pushed back expectations of a rate cut by the US Federal Open Market Committee. Data released by the US Labor Department on Thursday showed initial claims for state unemployment benefits fell 12,000 to a seasonally adjusted 201,000 in the week ended Saturday. Economists polled by Reuters had forecast the claims at 218,000.

According to the CME FedWatch Tool, rate cut expectations have been almost entirely wiped out at the next FOMC meeting in March, and only 21.0% of Fed fund futures traders expect a rate cut even at the meeting in May. It is only in mid-June that 64.7% of traders expect a cut of at least 25 basis points. The yield on the 10-year benchmark US Treasury note rose to 4.34%, from 4.31% at close of Indian market hours on Thursday.

"Flows have really slowed down in swaps recently, volumes really reflect that. There was some minor paying because of US yields," a dealer at a primary dealership said. "Some of the offshore guys have also remained paid since crude crossed $80 (a barrel)." Brent crude oil futures for April delivery have stayed above the crucial $80-a-bbl mark since Feb 7.

OUTLOOK

OIS rates are not traded on Saturday. On Monday, swap rates may open steady due to lack of triggers on the interest rate front. A sharp movement in US Treasury yields or crude oil prices may also lend cues at the opening.

The swap rate in the one-year segment is seen at 6.65-6.78% and in the five-year segment at 6.25-6.40%.

End

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

Edited by Ashish Shirke

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