Informist, Wednesday, Jan 31, 2024
By Nishat Anjum
MUMBAI – Most overnight indexed swap rates ended steady as traders avoided placing aggressive bets on caution ahead of the outcome of the US Federal Open Market Committee’s meeting and the presentation of the Interim Budget for 2024-25 (Apr-Mar), due on Thursday, dealers said.
The one-year swap rate settled at 6.60%, against 6.59% on Tuesday. The five-year swap rate ended at 6.19%, unchanged from the previous trading day.
Volumes in most swap contracts were low. The exception was the two-month contract, in which the volume was the highest since Aug 9. The volume was higher than even in the five-year swap contract, which is usually the most traded swap.
“It is possible that somebody is punting on the new financial year, since this contract matures on Mar 31,” a dealer at a private bank said. “Or else it would be bet before the MPC (Monetary Policy Committee) meet if they expect MIBOR (Mumbai Interbank Offer Rate) to ease after that.” The domestic rate-setting panel of the Reserve Bank of India is scheduled to meet on Feb 6-8.
Today, the MIBOR was pegged at 6.85%. A fall in the overnight MIBOR would be seen as the first sign of softening of monetary policy conditions in India, dealers said.
At the upcoming meeting of the Monetary Policy Committee, some traders expect a change in policy stance to ‘neutral’ from ‘withdrawal of accommodation’. This comes against the backdrop of multiple variable rate repo auctions conducted by the RBI, dealers said. Moreover, traders expect the overnight MIBOR–the floating leg of the OIS contract–to move to the 6.50-6.60% band by February, dealers said.
“The market is factoring in 60-65 bps of rate cuts, but we are expecting two cuts of 25 bps each,” a dealer at a primary dealership said. “I also think the rate cuts would be for keeping the real interest rate around 1% and not because of any growth pressures.” A real interest rate is one that has been adjusted to remove the effects of inflation. Currently, the repo rate is 6.50% and the RBI has projected Apr-Jun CPI inflation at 5.2%.
Some dealers said traders unwound their paid bets on the two-month swap rate on caution ahead of the two key events on Thursday. Meanwhile, traders paid fixed rates on the five-year swap rate, and bought the benchmark 7.18%, 2033 bond, as the spreads widened to around 86 basis points, which is considered lucrative, dealers said.
On the global front, 97.9% of Fed Fund Futures traders expect the target rate to remain unchanged at 5.25-5.50% in the ongoing FOMC meeting, according to the CME Group’s FedWatch Tool. Around 42.8% of the traders expect a 25 basis-point rate cut in March, with 56.3% expecting the rate to remain unchanged even then.
OUTLOOK
On Thursday, swap rates may open steady as traders avoid aggressive bets on caution ahead of the Interim Budget for 2024-25 (Apr-Mar), to be presented on the day, dealers said.
Swap rates may also take cues from the US Federal Reserve’s two-day meeting outcome early Thursday, dealers said. 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 6.50-6.65% and in the five-year segment at 6.15-6.30%.
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Rajeev Pai
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