Informist, Monday, Aug 14, 2023
By Nishat Anjum
MUMBAI – Overnight indexed swap rates ended higher today, tracking a rise in US Treasury yields, dealers said. The market was focussed more on India’s CPI data for July, due at 1730 IST, which may give insight into the rate trajectory.
The one-year swap rate settled at 6.94%, against 6.91% on Friday. The five-year swap rate ended at 6.59%, compared with 6.56% the previous day.
“Obviously there are fears that it (July CPI) may have inched up to 7%. If it is anything above 6.5%, then the yields will definitely go up,” a dealer at a primary dealership said. “There is no positive news on the global front as well.”
According to the median of an Informist poll of 26 economists, the relentless rise in tomato prices is likely to have led to a spike in India’s CPI inflation to 6.5% in July, the highest in at least six months. The headline inflation rate was 4.81% in the previous month and 6.71% in July last year.
The market remained lacklustre during the day, as many traders were absent due to an extended weekend because money markets are shut on Tuesday and Wednesday, dealers said.
“We were just tracking US yields during the day. It opened lower, but soon volume dried out as there is a lack of participation in the market,” a dealer at another primary dealership said. “The shorter end of the curve is also weighed by the liquidity conditions.”
The market remained worried about higher money market rates as liquidity may narrow going ahead due to incremental cash reserve ratio, dealers said. On Thursday, the Reserve Bank of India announced an incremental cash reserve ratio of 10% on increase in the scheduled banks’ net demand and time liabilities between May 19 and Jul 28, from the fortnight beginning Saturday.
The one-year swap rate has factored in one more rate hike by the Monetary Policy Committee, and the rate cuts are only seen in second half of 2024, dealers said.
In the US, yield on the 10-year US Treasury note rose to 4.19% today, from 4.11% at the end of Indian market hours on Friday.
US Treasury yields rose as producer price inflation for July was higher than market expectations. The producer price index rose 0.3% on month in July, the Bureau of Labor Statistics reported on Friday. This was the biggest monthly rise since January. The revised reading for June remained unchanged.
Producer price index gauges the costs that goods and services producers receive for their products as opposed to those that consumers pay. Economists had expected producer prices to inch up by 0.2% on month, as compared to the 0.1% uptick originally reported for June.
Core producer price index, which excludes food and energy, also increased 0.3%, the biggest monthly increase since November, after falling 0.1% in June. On a yearly basis, the core PPI rose 2.4%, the lowest since January 2021.
Higher-than-expected producer price index prompted fears that the US Federal Reserve may keep the rates higher for longer. The CME FedWatch tool showed that 88.5% Fed fund futures traders now expect the Fed to maintain status quo in the September meeting, while the rest expect a 25-basis-point rate increase.
Indian financial markets are shut on Tuesday for Independence Day. Money markets are shut on Wednesday as well due to Parsi New Year.
On Thursday, swap rates may take cues from the domestic CPI print for July, due after market hours today. The National Statistical Office is scheduled to release the inflation data at 1730 IST on Monday.
The market also awaits the US Federal Open Market Committee’s July meeting minutes scheduled to be released on Wednesday, which may give insight into rate trajectory in the US, 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 6.90-6.98%, and the five-year at 6.53-6.65%.
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Ashish Shirke
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