Informist, Thursday, Feb 8, 2024
By Nishat Anjum
MUMBAI – Overnight indexed swap rates rose today as traders paid fixed rates after the Monetary Policy Committee kept the policy stance unchanged in its sixth bi-monthly monetary policy for 2023-24 (Apr-Mar), dealers said. Some traders also paid fixed rates, tracking an overnight rise in US yields.
The one-year swap rate settled at 6.66%, against 6.61% on Wednesday. The five-year swap rate ended at 6.25%, against 6.21% on the previous trading day.
The Reserve Bank of India’s rate-setting panel today kept the policy repo rate unchanged at 6.50% and decided to maintain its stance of ‘withdrawal of accommodation’ to ensure inflation progressively aligns with the target, while supporting growth. Five of the six panel members voted to keep the repo rate unchanged, with external member Jayanth Varma voting to lower the policy repo rate by 25 bps. Similarly, five MPC members voted to maintain the ‘withdrawal of accommodation’ policy stance, while Varma voted to change the stance to ‘neutral’.
“It would be interesting to read what rationale Varma had behind dissenting. I thought there would be more reaction to the voting pattern,” a dealer at a primary dealership said. “They (RBI) didn’t even give any guidance on the liquidity front.”
Prior to the policy meeting, a section of the market had expected the MPC to change the policy stance as liquidity remained in a large deficit, dealers said. The RBI conducted variable rate repo auctions during the last two months to ease liquidity tightness in the system.
But liquidity conditions have eased this month, thanks to a pick-up in government spending. As a result, the RBI has done six variable rate reverse repo auctions since Friday to absorb surplus liquidity.
Traders who earlier received fixed rates hoping for a change in policy stance, unwound their bets, dealers said. Now, expectations of a stance change have shifted to the April policy, while the market expects the domestic rate-setting panel to opt for rate cuts only after the US Federal Reserve, dealers said. As of now, swap rates have factored in a rate cut of 25 basis points in the August policy review.
“This time they only took camouflage while highlighting different aspects. But in reality, we are going to mirror the Fed,” a dealer at a private bank said. “The RBI is not going to take much time to pivot, if the Fed starts cutting rates.”
According to the CME Group’s FedWatch tool, 81.5% of Fed fund futures traders expect the federal funds interest rate to remain at 5.25-5.50% in the March meeting. However, 55% of them expect a 25-bps rate cut in May.
During the day, the yield on the 10-year benchmark US Treasury note rose to 4.13% from 4.09% at the time Indian markets opened today. US yields rose intraday as the market awaited fresh key economic data from the US after recent comments by US Federal Reserve officials suggested that data was being eyed for any decision regarding the interest rate trajectory.
Fed Governor Adriana Kugler on Wednesday said that even as inflation was easing, the job was not done yet. More data is needed to provide evidence that inflation is going down in the world’s largest economy.
OUTLOOK
On Friday, swap rates may open steady as traders may avoid aggressive bets due to lack of fresh interest rate cues on the domestic front, 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 6.55-6.70% and in the five-year segment at 6.10-6.30%.
End
Edited by Avishek Dutta
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