India IRS Review: Steady on caution ahead of US FOMC rate decision

Informist, Wednesday, Sep 20, 2023

By Nishat Anjum and Aaryan Khanna

MUMBAI/NEW DELHI – Overnight indexed swap rates ended largely unchanged due to caution ahead of the US Federal Open Market Committee’s rate decision, scheduled after market hours, which may lend cues to the interest rate trajectory to the domestic economy as well, dealers said.

The one-year swap rate settled at 7.08%, flat against Monday’s close. The five-year swap rate ended at 6.78% against 6.77% the previous day.

During the day, traders paid fixed rates tracking rise in US Treasury yields, dealers said. However, the volume remained low as traders remained on the sidelines ahead of the US rate-setting panel’s decision.

“Offshore activity has not materialised, whether for or against the pause decision in the FOMC,” a dealer at a primary dealership said. “Almost the entirety of the activity has been between domestic players.”

US Treasury yields rose ahead of the US Fed’s policy review outcome. Rise in crude oil prices weighed on the market sentiment as it raised fears that higher commodity prices may lead the Fed to hike rates further, or keep them higher for a longer period of time.

The rate-setting panel is widely expected to keep interest rates unchanged at 5.25-5.50%. Investors will look out for comments from Fed Chair Jerome Powell for further cues into the rate trajectory in the world’s largest economy. The Fed is also due to release its Summary Economic Projections, which will give the Fed’s view on trajectory of interest rates, inflation and economic growth.

Meanwhile, in the short-term swap rates, traders paid fixed rates in early trade as the banking system liquidity remained in deficit, dealers said. 

However, the domestic monetary policy tightness was on expected lines and most traders had already priced it in, limiting the impact on OIS rates.

“I was actually expecting it to weigh on the market, but I think the market was prepared for these levels,” a dealer at a private bank said. “Maybe if Powell is dovish, then we will a lot of unwinding of paid bets that happened when US yields crossed 4.30% (on the benchmark 10-year note).”

OUTLOOK

On Thursday, swap rates may take cues from the US FOMC rate decision and comments from Fed Chair Jerome Powell, due after market hours, 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 6.90-7.15% and in the five-year segment at 6.60-6.85%.

At 1700 IST

 Monday

1-year OIS

7.08%7.08%

2-year OIS

6.84%6.84%

5-year OIS

6.78%6.77%

2-year MIFOR

7.19-7.31%7.19-7.31%

5-year MIFOR

7.23-7.35%7.22-7.34%

End

US$1 = 83.07 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Akul Nishant Akhoury

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Source: Cogencis