Informist, Tuesday, Aug 8, 2023
By Kasthuri Akhil
NEW DELHI – Overnight indexed swap rates ended lower tracking a fall in US Treasury yields. Traders avoided aggressive bets on caution ahead of the Reserve Bank of India’s policy decision on Thursday, dealers said.
The one-year swap rate settled at 6.88%, against 6.90% on Monday. The five-year swap rate ended at 6.52%, against 6.58% the previous day.
Traders received fixed rates today as the yield on the benchmark 10-year US Treasury note fell to 3.99% towards the end of Indian market hours from the market’s close of 4.10% on Monday. US Treasury yields fell ahead of the release of US inflation data on Thursday. Investors keenly eye the inflation figure to assess if the US Federal Reserve’s past rate hikes have the desired results, and to figure the central bank’s next move.
“On the (domestic)policy front, there is a hawkish view, but broadly the market view is that US rates have peaked out,” a dealer at a primary dealerhsip said. “In the domestic market too there are very few people talking about a rate hike now, which is not significant.”
On Monday, US Federal Reserve officials gave mixed signals about the central bank’s next monetary move. US Fed Governor Michelle Bowman said she felt more interest rate hikes were needed to adequately tame inflation.
Meanwhile, New York Fed President John William, a permanent voting member of the US Federal Open Market Committee, said in an interview to The New York Times that the central bank was nearing the peak federal funds rate and pointed at the fact that underlying inflation pressure had come down.
The Federal Open Market Committee raised the federal funds target range by 25 basis points to 5.25-5.50% in July.
Dealers said that the receiving momentum today was strictly based on US yield movement. Domestic traders were more inclined towards paying fixed rates on the expectation of the Reserve Bank of India Governor Shaktikanta Das’ post-policy commentary to indicate continued monetary policy tightening conditions going forward.
Moreover, the market expects the domestic CPI inflation for July and August to top the RBI’s medium-term target band of 2-6% due to high food inflation caused by monsoon-related disturbances, making the case for the central bank to refrain from hinting at a softer policy at the upcoming review, dealers said.
Speculations regarding the possibility of a rate hike in 2023 were also doing the rounds in the market, leading traders to exercise some caution, dealers said.
“If you see, the amount of receiving expected to be done is not there. It is more of a trading call, rather than positional,” a dealer at a primary dealership said. “There are people, although less, who are expecting a rate hike in this policy itself and some who think a cash reserve ratio hike is also possible.” Currently, the cash reserve ratio stands at 4.5% of a bank’s net demand and time liabilities.
According to an Informist poll of 35 economists, treasury heads, and analysts, 34 expect the Monetary Policy Committee to keep the repo rate unchanged at 6.50%, while 31 expect the panel to maintain the ‘withdrawal of accommodation’ stance at the end of its three-day meeting on Thursday.
OUTLOOK
On Wednesday, swap rates may open steady due to lack of significant domestic cues on interest rates, ahead of the MPC meeting’s outcome, Thursday. The swap market may take cues from several US Federal Reserve officials who are scheduled to speak this week, dealers said.
US Federal Bank of Richmond President Thomas Barkin and Federal Bank of Philadelphia President Patrick Harker, are due to speak after market hours today.
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 6.40-6.65%.
End
Edited by Maheswaran Parameswaran
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