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Thursday, October 21, 2021

India IRS Review: Steady; market cautious after recent volatility

Informist, Thursday, Oct 14, 2021

 

By Nikhil Patwardhan

 

MUMBAI – Overnight indexed swap rates ended steady and trade volume was low today because dealers avoided aggressive bets after the recent volatility, especially ahead of a long weekend.

 

Indian financial markets are shut Friday on account of Dusshera.

 

The one-year rate ended at 4.05% against 4.03% on Wednesday, and the five-year swap rate ended at 5.46% against the previous close of 5.44%.

 

Though swap rates had fallen earlier in the day tracking a fall in US Treasury yields, a sharp intraday rise in crude oil prices prompted some traders to pay fixed rates, especially in the five-year segment, due to which rates were inclined slightly upwards, dealers said.

 

However, the recent volatility, which led to a near 25-basis-point movement in the five-year OIS rate over the last two weeks, kept dealers on the sidelines as they avoided large bets.

 

After having fallen for two consecutive days, crude oil prices rose again today, although marginally, despite the Organization of the Petroleum Exporting Countries and allies cutting the global demand outlook for this year, as the International Energy Agency said shortages of natural gas in Europe and Asia are boosting demand for crude.

 

Brent crude oil futures for December delivery rose more than $1 today to above $84 a barrel. The contract was last at $84.22 per bbl. Typically, rise in crude oil prices increases upside risks to inflation in India and reduces the room for the Reserve Bank of India to prolong its monetary policy accommodation.

 

“The rally in crude oil prices is just sparking inflation fears and at the same time there’s a supply crunch of other commodities which is further putting upside risks to inflation in the near-term,” said a dealer with a private bank.

 

“If crude (Brent December futures) stays near $84 per bbl, I don’t see the five-year rate falling below 5.40% in the near-term, especially with the 10-year US Treasury yield, too, above 1.50%,” the dealer added.

 

While the five-year rate has seen a movement of nearly 25 basis points over the last two weeks, the one-year swap rate has been confined to a narrow band of 6 bps. The primary reason behind dealers avoiding aggressive bets in the one-year segment is essentially uncertainty over the course of RBI’s liquidity normalisation.

 

At its 14-day variable rate reverse repo auction worth 4 trln rupees on Friday, the RBI 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 bps. 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%.

 

OUTLOOK

Indian financial markets are shut Friday on account of Dusshera and swap rates are not traded Saturday.

 

On Monday, OIS rates may open steady due to lack of significant domestic cues on rates as dealers may avoid large bets in a truncated week.

 

On Tuesday, money markets are shut on account of Eid-e-Milad.

 

Swap rates are expected to stay within a narrow range due to the recent volatility. Any sharp movement in crude oil prices and US Treasury yields over the weekend may lend cues at open on Monday.

 

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%.

 

 

At 1530 IST

WEDNESDAY

1-year OIS

4.05%

4.03%

2-year OIS

4.52%

4.50%

5-year OIS

5.46%

5.44%

2-year MIFOR

4.83-4.99%

4.85-5.01%

5-year MIFOR

5.72-5.88%

5.75-5.91%

 

End

 

US$1 = 75.25 rupees

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

 

Edited by Ashish Shirke

 

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

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Source: Cogencis

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