Government bonds and the rupee gained on Thursday after the US Federal Reserve meeting outcome signalled an end to the rate tightening path and is expected to cut interest rates three times in 2024. The US rate-setting panel decided to keep key rates unchanged at 5.25-5.50 per cent for the consecutive third meeting.
The yield on the benchmark 10-year government bond settled six basis points lower at 7.20 per cent, almost a three-month low, whereas the local currency settled at Rs 83.33 per US Dollar, against Rs 83.40 per Dollar on Wednesday.
Traders expect the benchmark yield to trade between 7.10-7.25 per cent in the near term, given the positive sentiment.
“A part of how rates will pan out for us will be a function of how quickly inflation moves domestically. While of course, there is an impact of global factors on Indian rates, but I don’t see a runaway rally happening immediately in the bond market,” a treasury head at a private bank said.
Meanwhile, Overnight Indexed Swap (OIS) rates, a crucial indicator reflecting expectations for interest rate changes, hint that domestic markets have preponed their projections for the Reserve Bank of India (RBI) to implement monetary policy easing in June 2024, as opposed to the earlier expectation of rate cuts in August 2024.
OIS rates, the principal tool for hedging interest rate risk in India, slumped on Thursday after the US Federal Reserve meet outcome on Wednesday. The one-year OIS rate fell by nine basis points (bps) to settle at 6.73 per cent, which was the lowest in six months, whereas the five-year OIS rate fell by 15 bps to settle at 6.25 per cent, which was the lowest in five months.
“The OIS market seems to be seeing normalisation of liquidity as early as January and then maybe a February change in stance followed by a rate cut in June. That is what seems highly likely or at the minimum, liquidity going from deficit to surplus and a change in stance. So rates falling from 6.85 per cent currently to 6.25 per cent. So effectively a reduction of about 50 basis points. What was being talked about in August now has been brought ahead to June because as of now, it looks like the Fed is going to move in March,” said Vikas Goel, Managing Director and CEO at PNB Gilts Ltd. “Although the dot plot says three, but the market seems to be discounting at least four cuts from the Fed. So that means our rate-cutting cycle can start as early as June,” he added.
The rupee had hit a new closing low against the greenback on Wednesday due to continuous demand from importers for the Dollar ahead of the US Federal Reserve meeting. On Thursday, the Dollar Index, which measures the strength of the greenback against a basket of six major currencies, fell to 102.54, against 103.95 on Wednesday.
“Rupee traded positive as the Dollar Index dropped lower below 102.4 after the Fed hinted at sooner rate cuts in 2024 as the economy cannot be left weak by waiting for a recession to start to take a step on cuts. Inflation has been in a downtrend which will help the economy. The Rupee broadly is in a sideways trend between Rs 83.15 per Dollar – Rs 83.45 a Dollar,” said Jateen Trivedi, VP Research Analyst at LKP Securities.