Informist, Friday, May 19, 2023
By Anjali
NEW DELHI – Overnight indexed swap rates ended off the day’s lows today as traders paid fixed rates across tenures to protect their underlying investments in government bonds, dealers said. Prices of government bonds erased all gains by the end of the trade, following the Reserve Bank of India’s announcement of lower-than-expected surplus transfer to the government, dealers said.
The RBI’s central board of directors approved the transfer of 874.16 bln rupees as surplus to the central government for 2022-23 (Apr-Mar). The amount is sharply higher than the central bank’s surplus transfer of 303.07 bln rupees for the previous financial ended March 2022.
However, the market expected the dividend payment of about 1.0-1.5 trln rupees, dealers said. The Budget for 2023–24 (Apr-Mar) pegged the government’s income from dividend of the RBI and state-owned banks at 480 bln rupees.
The one-year swap rate settled at 6.56% against 6.54% on Thursday, while the five-year swap rate ended at 5.97% against 5.95% on the previous trading day.
“People are paying because the dividend was lower than the market expectation,” a dealer at a private bank said. “Those were mostly traders who bought (gilts) on the expectation of higher dividend, they started selling, hence, paying in OIS.”
Meanwhile, shorter tenure swaps traded in a thin band throughout the day as traders avoided placing aggressive bets due to uncertainty around the rate view, dealers said.
A section of the market expects the domestic rate-setting panel to start rate cuts as early as October. Dealers cited a series of reasons behind this expectation. Apart from seeing headline inflation nearing the RBI’s 4% target in the coming months, negative WPI-based inflation in April is expected to reflect in easing retail inflation in the coming months, dealers said.
WPI inflation moderated to a near-three-year low of (-)0.92% in April from 1.34% in March. The deflation in WPI, the first in 33 months, was primarily due to the statistical effect of a high base and a fall in commodity prices.
However, another section of the market thinks it is too early to expect the RBI’s Monetary Policy Committee to cut rates in October, dealers said.
“The short terms are not moving from the last few days, because of the rate view,” a dealer at another private bank said. “The gilts are following the same trend.”
Data from the US suggested that the world’s largest economy was resilient despite the US Federal Reserve’s monetary policy tightening over the past year. Data from the Department of Labor on Thursday showed initial jobless claims in the US fell to 242,000 last week from 264,000 the week prior. Economists from Reuters had forecast a figure of 254,000.
OUTLOOK
Swaps are not traded on Saturdays.
On Monday, swap rates are seen opening steady due to lack of significant domestic cues, 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 6.50-6.60%, and the five-year at 5.90-6.05%.
End
Edited by Deepshikha Bhardwaj
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