Informist, Monday, Sep 18, 2023
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended little changed due to caution ahead of the US Federal Open Market Committee’s rate decision on Wednesday, which may lend cues to the interest rate trajectory in the world’s largest economy, dealers said.
The one-year swap rate settled at 7.08% against 7.07% on Friday. The five-year swap rate ended at 6.77% against 6.78% the previous day.
The US Federal Reserve’s rate-setting panel will start debating interest rates at its two-day meeting, at which it is expected to stand pat on rates.
According to CME’s FedWatch tool, Fed funds rates traders are near unanimous in their expectation of the rate being held at 5.25%-5.50% on Wednesday. Meanwhile, 69% of traders expect the same at the conclusion of its November meeting, with the others betting on a 25-basis-point rate increase.
US Fed Chair Jerome Powell’s comments after the policy will be closely eyed on whether the world’s largest economy has finally seen its last rate hike in the current cycle, dealers said. The dot-plot of US Fed members’ expectations of the terminal interest rates in 2023 and potential rate cuts in 2024 may guide the market.
During the day, lack of interest rate cues on the domestic front kept volumes relatively low, while global triggers provided no relief from paying fixed rates, dealers said.
“The market has been dictated throughout the day by the domestic side,” a dealer at a primary dealership said. “At no point of time did (US monetary) policy or US yields dictate the paying pressure.”
Traders paid fixed rates early in the day in short-term swap rates as the Mumbai Interbank Rate –- the floating leg of the interest rate swap contract – was set at 6.89% today from 6.85% on Friday as liquidity turned to a deficit. At the start of trade, liquidity in the system was estimated to be in a deficit of 675.77 bln rupees, down from a 26.96-bln-rupee surplus on Friday.
But the domestic monetary policy tightness was on expected lines and most traders had already priced it in, limiting the impact on OIS rates, dealers said.
Meanwhile, crude oil prices remained high due to supply tightness and optimism that the Chinese economy was gaining strength, while mixed data kept the yield on the benchmark 10-year US Treasury note remained above the crucial 4.30% mark, which weighed on domestic bonds, dealers said.
Brent crude for November delivery traded above the $94-a-bbl mark through the day, well above the Reserve Bank of India’s baseline assumption for $85-a-bbl for the Indian crude basket for its 2023-24 (Apr-Mar) inflation projections.
Some traders unwound their paid fixed rate bets in the five-year swap rate, which they had placed to protect their underlying holdings in government securities as gilt prices rose, dealers said. With bonds giving up most gains by the end of the day, the five-year contract also returned close to the previous day’s close.
OUTLOOK
Swaps will not be traded on Tuesday as money markets will be shut for Ganesh Chaturthi.
On Wednesday, swap rates may open steady due to caution ahead of the US FOMC rate decision after market hours, 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 6.90-7.15% and in the five-year segment at 6.60-6.85%.
End
US$1 = 83.27 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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