Informist, Wednesday, Aug 3, 2022

By Shubham Rana

NEW DELHI – Overnight indexed swap rates rose today tracking a rise in US Treasury yields on Tuesday after US Federal Reserve officials signalled they will continue to raise interest rates to curb high inflation.

The one-year overnight indexed swap rate settled at 6.15%, against 6.10% on Tuesday. The five-year swap rate ended at 6.30%, against 6.22% the previous day.

Traders paid higher fixed rates after the yield on the 10-year benchmark US Treasury note ended 15 bps higher at 2.75% on Tuesday.

On Tuesday, San Francisco Fed President Mary Daly said the Fed was “nowhere near” done before stopping its war on inflation, and Chicago Fed President Charles Evans said the Federal Reserve could proceed with a 50- or even a 75-basis-point rate hike in September meeting if inflation does not abate before then.

Yields also rose as demand for haven assets fell after US House Speaker Nancy Pelosi arrival in Taiwan, safely, despite threats of action from China.

"I think the OIS market was less volatile today, especially compared to the surge in US yields," a dealer at a private bank said. "Rate hike expectations are set now so traders were wary of placing aggressive bets before policy."

The rise in short-term swap rates was limited as the Reserve Bank of India is expected to signal a softening in the pace of its monetary policy path at the policy outcome on Friday, dealers said. The central bank is also seen cutting its projection for retail inflation for 2022-23 (Apr-Mar) at the meeting, from the 6.7% estimate it had given in June.

The majority of the market is betting on the Monetary Policy Committee to raise rates by 35-50 basis points.

In a poll by Informist, all 30 respondents expect the rate-setting panel to hike the repo rate, but the divide on quantum was clearly visible. While a dozen respondents expect repo rate to be hiked exactly by 50 bps, 11 see a hike by 35 bps, two by 25 bps, and one by 40 bps. The other four respondents gave a range for the hike--two of 35-50 bps, and one each of 25-35 bps and 40-50 bps.

"The rate hike expectations have changed from an outright 50 bps hike to 35-50 bps after the US rate hike," a dealer at another private bank said. "I think the market has lowered its expectations too much without any major changes in economic data points." 

OUTLOOK

On Thursday, swap rates are seen steady on caution before the outcome of the Monetary Policy Committee meeting on Friday.

In a poll by Informist, all 30 respondents expect the rate-setting panel to hike the repo rate, but the divide on quantum was clearly visible. While a dozen respondents expect repo rate to be hiked exactly by 50 bps, 11 see a hike by 35 bps, two by 25 bps, and one by 40 bps. The other four respondents gave a range for the hike--two of 35-50 bps, and one each of 25-35 bps and 40-50 bps. 

Any movement in US Treasury yields and crude oil prices may lend cues when the market opens.

The swap rate in the one-year segment is seen at 6.10-6.35%, and the five-year segment at 6.25-6.50%.

End

US$1 = 79.16 rupees

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

Edited by Arshad Hussain

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