Informist, Friday, Feb 2, 2024
By Nishat Anjum
MUMBAI – Overnight indexed swap rates recovered from the day’s low, as traders paid fixed rates as the Reserve Bank of India unexpectedly announced a variable rate reverse repo auction at 1200-1230 IST, dealers said. Earlier, the swap rates fell, tracking a slump in US Treasury yields.
The one-year swap rate settled at 6.60%, against 6.59% on Thursday. The five-year swap rate ended at 6.14%, unchanged from the previous trading day. During the day, the one-year swap hit a low of 6.54%, while the five-year contract touched a low of 6.09%.
Traders paid fixed rates after the Reserve Bank of India announced the auction of a 4-day variable rate reverse repo auction for a notified amount of 500 bln rupees, dealers said. This was unexpected as the banking system liquidity was already in a deficit of over 2 trln rupees.
“This is a clear sign that the RBI will not run ahead of the Fed (US Federal Reserve),” a dealer at a private bank said. “Many of those who were expecting a stance change are now more cautious.”
Dealers said the central bank’s decision to conduct a reverse repo auction at this juncture may be an indication to the market that it was too early to expect an ease in liquidity stance at the Monetary Policy Committee meeting, scheduled Feb 6-8.
At the policy review, some traders had expected 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.
At the end of trade on Thursday, the liquidity deficit in the banking system was at 2.22 trln rupees, as against 2.29 trln rupees at the end of trade on Wednesday, according to the RBI data.
In early trade, traders received fixed rates tracking an overnight fall in US Treasury yields, dealers said. The yield on the 10-year benchmark US Treasury note fell to 3.88%, from 3.94% at the time of Indian markets close on Thursday.
“It is difficult to break the 5-year swap contract on either side,” a dealer at a primary dealership said. “I don’t see it falling below 6.10% ahead of the (monetary) policy (review) next week.
US Treasury yields fell to their lowest levels so far in 2024. US yields fell after the US labor department said initial claims for state unemployment benefits increased 9,000 to a seasonally adjusted 224,000 for the week ended Jan 27. A poll by Dow Jones had forecast 212,000 claims for the latest week.
Moreover, US Treasury yields fell after the US Federal Reserve Chair Jerome Powell said in the last Federal Open Market Committee meeting that interest rates had peaked for this cycle and would likely move lower in coming months as inflation continues to fall. According to CME’s FedWatch Tool, less than 40% of Fed fund futures traders expect a 25-basis-point rate cut in March, from the current 5.25-5.50%.
OUTLOOK
Swaps are not traded on Saturdays. On Monday, swap rates may open steady due to a lack of fresh interest rate cues on the domestic front, dealers said.
Traders may take cues from the US employment report for January, scheduled to be released at 1900 IST. 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 6.05-6.22%.
End
Edited by Aditya Sakorkar
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