Informist, Wednesday, Aug 9, 2023
By Kasthuri Akhil
NEW DELHI – Overnight indexed swap rates ended largely unchanged as traders maintained caution, awaiting the Reserve Bank of India to deliver its monetary policy decision on Thursday, dealers said.
The one-year swap rate settled at 6.89%, against 6.88% on Tuesday. The five-year swap rate ended at 6.52%, unchanged from the previous day.
The central bank is expected to keep monetary policy tight, even as it stands pat on rates and the policy stance at the end of the three-day meeting, dealers said.
In a poll of 35 economists, treasury heads, and analysts by Informist last week, 34 respondents said they expect the rate-setting panel to keep the repo rate unchanged at 6.50%, while 31 expect the panel to maintain the ‘withdrawal of accommodation’ stance.
Concerns of future policy action remained in the market, with CPI inflation likely to top the RBI’s medium-term target band of 2-6% for July and August on the back of high food inflation, dealers said.
“Swap rates will watch for inflation numbers more than the governor’s (RBI Governor Shaktikanta Das) commentary,” a dealer at a primary dealership said. “If Das’ commentary is hawkish, and inflation figures come in at 7% or above, swap rates could go further up. Otherwise, there won’t be many surprises.”
Traders expect the RBI to revise its inflation projection for Jul-Sep. Some traders also expect an upward revision in the inflation forecast for 2023-24 (Apr-Mar), dealers said.
In its June monetary policy statement, the RBI had lowered its inflation forecast for Jul-Sep by 20 basis points to 5.2%. It also reduced its inflation forecast for the current financial year by 10 bps to 5.1%.
Speculation regarding the possibility of a rate hike in 2023 was doing the rounds in the market, leading traders to exercise some caution. Dealers said the one-year swap rate has already factored in a single hike, and any indication from the central bank wiping out prospects of another rate increase may cause the one-year contract to fall to 6.80%.
“…one 25-basis-point rate hike has been fully priced in and will likely sustain into policy,” a dealer at another primary dealership said. “It is the best way to hedge against CRR (cash reserve ratio) hike and rate fears as any liquidity measures aren’t expected.”
Some traders flagged concerns about the likelihood of the central bank introducing measures in light of the recent banking system liquidity that has been at nearly 2 trln rupees since a week now, to drive overnight rates higher, dealers said.
OUTLOOK
On Thursday, swap rates may open steady ahead of the MPC meeting’s outcome later in the day, 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 6.40-6.65%.
End
Edited by Vandana Hingorani
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Source: Cogencis
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