Informist, Monday, Jul 31, 2023
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates inched up today as traders paid fixed rates, fearing another rate hike in India amid a worsening inflation outlook, dealers said.
The one-year swap rate settled at 6.87%, against 6.86% on Friday. The five-year swap rate ended at 6.51%, against 6.48% the previous day.
Dealers said swap rates of tenures up to two years reflect the possibility of another rate hike by the Reserve Bank of India’s Monetary Policy Committee in the next six months. On Friday, the one- and two-year contracts hit their highest levels since March, but ended off highs.
The movement in swap rates today was guided by the momentum from Friday amid a lack of fresh triggers on interest rates, dealers said. CPI inflation prints for the next few months may also make the case for further rate increases in India, they said.
Retail inflation data for July is expected to print well above the RBI’s medium-term target band of 2-6%, the first breach of its target since February. While inflationary concerns lie mainly in the food basket, the 10% rise in crude oil prices in July is also among the forefront of worries in an oil-importing nation like India, dealers said.
Brent crude oil futures for September delivery were at $85.59 per barrel at the end of Indian market hours today, compared with $83.91 per bbl on Friday. The RBI’s inflation projections for 2023-24 (Apr-Mar) assume India’s crude oil basket to cost $85 per bbl on an average through the year.
Some foreign funds based in Asia have been paying fixed rates in the domestic OIS market tracking the rise in crude prices as concerns over imported inflation build up, dealers said.
“I can’t confidently tell you where rates might stop rising in this environment,” a dealer at a primary dealership said. “While domestic players are receiving (fixed rates) when they get positive carry, there is too much offshore activity that is just bearish.”
While swap rates reflect that the repo rate is not going to settle at the current 6.50%, a rate hike in the upcoming August is not a widespread market expectation, dealers said. The RBI’s Monetary Policy Committee is seen standing pat on rates on Aug 10, while keeping the door open for future rate increases in a bid to bring inflation closer to the Reserve Bank of India’s 4% target.
The winding up of the US Federal Reserve’s monetary policy tightening soon could also prevent the risk of another domestic rate increase, dealers said.
The personal consumption expenditures price index, excluding food and energy, increased just 0.2% on month in June, which was in line with the estimate provided by Dow Jones. Core personal consumption expenditures rose 4.1% on year compared with the estimate of 4.2%. The annual rate was the lowest since September 2021.
This sparked hopes that the Fed’s aggressive rate hike cycle may end, with last week’s 25-basis-point rate hike being the last one. At the same time, strong growth data in the world’s largest economy kept the market on tenterhooks on what the US central bank would do on rates, dealers said.
While traders took heed of the movement in US Treasury yields, the 10-year benchmark US note traded near 4%, giving dealers no fresh cues.
“The pricing will continue to reflect a rate hike unless there are offshore receiving flows to counteract the offshore paying (of fixed rates),” a dealer at a foreign bank said. “That sort of positivity is likely to happen only when US yields come off.”
OUTLOOK
On Tuesday, swap rates may open steady due to lack of significant domestic cues on interest rates.
Swap rates would continue to reflect a hike in domestic interest rates on the back on offshore traders paying fixed rates, 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 6.75-6.95%, and the five-year at 6.35-6.60%.
End
Edited by Tanima Banerjee
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