Informist, Thursday, Feb 1, 2024
By Aaryan Khanna and Nishat Anjum
NEW DELHI – Overnight indexed swap rates ended lower today, with the five-year swap rate falling sharply, tracking a fall in US Treasury yields, before focus shifted to the presentation of the Interim Budget for 2024-25 (Apr-Mar), dealers said. The fall was, however, limited in the short-term swap rates.
The one-year swap rate settled at 6.59%, against 6.60% on Wednesday. The five-year swap rate ended at 6.14%, the lowest since Jun 14, against 6.19% on the previous trading day.
The yield on the 10-year benchmark US Treasury note fell to 3.95%, from 4.03% at the time of Indian markets close on Wednesday. US yields fell on comments from the Treasury department on Wednesday, stating that it plans to continue the gradual increase of coupon auction sizes through April, beyond which no further increases are expected for the next several quarters. Investors also digested the outcome of the US Federal Open Market Committee meeting, where the target rate was kept unchanged at 5.25-5.50% for the fourth consecutive meeting. The policy statement also showed that the central bank is not in a rush to cut rates, and it will only reduce rates once it gains more confidence that “elevated” inflation is moving towards its 2% target at a time of “solid” economic growth and strong job gains.
“US yields helped at the start of the day, but after that Budget activity took over,” a dealer at a primary dealership said. “The theme of fiscal consolidation may allow monetary policy to be softer.”
The Interim Budget today projected a fiscal deficit of 5.1% of GDP for the next financial year starting April, and lowered the target for 2023-24 (Apr-Mar) to 5.8% of GDP.
The fiscal deficit of 5.1% for 2024-25 is below the consensus estimate. According to an Informist poll, the fiscal deficit was seen at 5.3% of GDP for the next financial year.
“We continue on the path of fiscal consolidation, as announced in my Budget speech for 2021-22, to reduce the fiscal deficit below 4.5% by 2025-26,” Finance Minister Nirmala Sitharaman said presenting the Interim Budget in Parliament.
In absolute terms, the fiscal deficit for 2024-25 is estimated at 16.855 trln rupees, down 2.8% from the revised estimate of 17.348 trln rupees in the current financial year. The fiscal deficit in 2023-24 is 520 bln rupees lower than the Budget estimates in absolute terms. The Budget for 2023-24 had projected a fiscal deficit at 17.868 trln rupees or 5.9% of GDP.
“There was bond-swap activity today, so that kind of increased the volume in the 5-year contract,” a dealer at a private bank said. “There were no stop-losses hits today, as there were not a lot of traders on the paying side. For now, I see the 6.10-6.22% range for the 5-year swaps.”
Going forward, traders expect the spread between the benchmark 7.18%, 2033 bond and 5-year swap contract to narrow, as the demand-supply dynamics turn positive in the gilts market, dealers said. Currently, the spread between both is at 92 basis points.
Meanwhile, the fall was limited in the one-year swap rate due to the ongoing liquidity deficit in the banking system, dealers said. At the end of trade on Wednesday, the liquidity deficit in the banking system was 2.29 trln rupees, according to the RBI data.
The market will now shift the focus to the Reserve Bank of India’s Monetary Policy Committee meeting, scheduled from Feb 6-8, dealers said. At the monetary policy review, 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.
OUTLOOK
On Friday, swap rates may take cues from the US weekly jobless claims data, released after market hours today, dealers said. For the week ended Saturday, the number of US citizens who applied for jobless claims rose by 9,000 to 224,000. This was higher than the estimate of 214,000.
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 6.10-6.25%.
End
Edited by Vidhi Verma
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