Informist, Wednesday, Oct 13, 2021
By Nikhil Patwardhan
MUMBAI – The overnight indexed swap rates ended on a mixed note today with the five-year swap rate plunging due to global cues and the one-year rate ending steady.
The five-year OIS rate slumped for the second day tracking a fall in US Treasury yields and crude oil prices as many dealers were of the opinion that the recent heavy paying in the five-year OIS, which had resulted in a sharp rise in the rate, was slightly overdone.
The five-year swap rate ended at 5.44% against the previous close of 5.51%.
The yield on the 10-year US Treasury note ended lower on Tuesday ahead of the release of US September inflation data and minutes from the latest US Federal Reserve meeting. The yield fell below the psychologically-crucial mark of 1.60% to settle at 1.59% on Tuesday from 1.61% on Monday. It fell further today and was last at 1.56%.
A fall in US Treasury yields widens the interest rate differential between the safe-haven asset and emerging market debt, making the latter more appealing for foreign investors.
The crude oil prices, too, ended slightly lower on Tuesday snapping a three-day gaining streak. The Brent crude oil December futures contract ended at $83.42 a barrel, and it fell further today and was last at $83.14/bbl.
Typically, a fall in crude oil prices reduces upside risks to inflation in India and gives the Reserve Bank of India more room to prolong its monetary policy accommodation.
While, the Brent crude oil December contract continued to trade above the psychologically-crucial mark of $80/bbl, and the US Treasury yield remained high, today’s fall prompted traders to unwind their fixed paid positions in the five-year OIS rate, dealers said. Traders had heavily paid recently which had resulted in a more than 20-basis-point-rise in the five-year segment.
Moreover, the inflation print for September which was released after market hours on Tuesday, showed the CPI inflation had fallen to a five-month low of 4.35%. The print was keenly monitored by the market to see whether the recent rise in prices of crude oil and other commodities had an impact on the inflation print.
The inflation print for September was also below the consensus estimate of 4.5% in a poll by Informist, and takes the average for Jul-Sep to 5.1%, matching the RBI’s most recent forecast.
With September’s print, inflation for the first half of 2021-22 (Apr-Mar) comes at 5.33% and the RBI has estimated CPI inflation print for the whole of 2021-22 at 5.3%. The market thus expects the inflation to fall further or stay around 5.3% levels in Oct-Mar if RBI’s estimates are to come true, dealers said.
The central bank had slashed inflation estimates for 2021-22 (Apr-Mar) by 40 basis points last week at its monetary policy meeting.
The benign inflation print also prompted dealers to receive in the already heavily-paid swaps market, dealers said.
“Some relief from US yields was there and the reaction of US yields to today’s inflation print and minutes of Fed will hold importance,” said a dealer with a private sector bank.
“Also our CPI inflation data provided some relief and some were waiting to unwind their positions I guess in the five-year segment after recent heavy paying today they just took an opportunity to do that.”
While the five-year swap rate slumped, the one-year OIS ended steady as dealers avoided aggressive bets amid uncertainty over the course of the RBI’s liquidity normalisation.
The one-year OIS ended at 4.07% against the previous close of 4.05%.
The RBI on Friday at its 14-day variable rate reverse repo auction worth 4 trln rupees set the cutoff at the highest possible rate of 3.99%. The central bank also set cutoff at 3.90% at the 2-trln-rupee eight-day reverse repo auction that it conducted on Tuesday, sharply above consensus estimate of 3.68% and the weighted-average rate of 3.71%.
Dealers interpreted it as the central bank’s indication of nudging the overnight rates higher in a bid to set the stage for a hike in the reverse repo rate. However, comments from top RBI officials prompted many investors to believe that a hike in reverse repo rate would only happen in February, thus creating uncertainty over the course of the RBI’s liquidity normalisation.
The one-year swap rate, which is impacted by the liquidity conditions in the banking system, currently reflects a reverse repo rate hike of 40 basis points. Typically, the spread between the one-year OIS and overnight cost of funds is 25 bps–currently the overnight cost of funds is closer to the reverse repo rate of 3.35%.
On Thursday, OIS rates may open steady due to lack of significant domestic cues, with dealers digesting the CPI inflation print for September.
Dealers may also avoid aggressive bets in a truncated week as financial markets will remain closed on Friday on account of Dussehra.
However, swap rates are expected to stay within a narrow range due to the recent volatility.
Any sharp overnight movement in crude oil prices and US Treasury yields may lend cues at open. All eyes will be on US inflation data and the Federal Reserve’s minutes of the September policy meeting.
The swap rate in the one-year segment is seen at 3.90-4.10%, and in the five-year at 5.35-5.60%.
US$1 = 75.37 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Michael Correya
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