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India IRS Review: Up to 3-yr rates rise on liquidity tightening fears

Informist, Tuesday, Oct 26, 2021


By Nikhil Patwardhan


MUMBAI – Overnight indexed swap rates, especially those maturing in the 1-month to three-year segment, rose further today, after having surged on Monday, as dealers continued to unwind received positions on the view that the Reserve Bank of India would tighten liquidity in the banking system sooner rather than later.


The one-year rate ended at 4.31% against 4.28% on Monday, while the five-year swap rate ended at 5.64% against the previous close of 5.63%.


Both onshore and offshore traders unwound received positions, which led to short-term rates surging, dealers said. But very few were taking fresh paid positions amid uncertainty over the trajectory of rates in the near-term.


The uncertainty was primarily due to the central bank’s recent actions, wherein the RBI is setting high cutoff rates at its variable rate reverse repo operations. The high cutoff rates set by the central bank are seen as an attempt to nudge short-term rates higher.


At its 12-day variable rate reverse repo auction last week, the central bank set the cutoff at the highest possible rate of 3.99%. This is the fourth time since September that the RBI has set the cutoff at 3.99%. The cutoffs initially were sharply higher than the weighted average rates and higher than what the market had expected, which had prompted many dealers to believe that the central bank is hinting at tightening liquidity and eventually normalising its ultra-accommodative monetary policy.


Today, at the 7-day variable rate reverse repo auction worth 2 trln rupees, too, the central bank set cutoff at the highest possible 


The central bank has also been hiking the quantum of its variable rate reverse repo operations since August in phases, and by December the quantum will be 6 trln rupees according to RBI Governor Shaktikanta Das’ monetary policy review address earlier this month.


Moreover, the minutes of the RBI’s October monetary policy meeting, released after market hours on Friday, showed that members of the rate-setting panel were concerned about inflation in the near-term due to a rise in global commodity prices. Comments from more members of the panel, thus, suggested that the RBI could start considering a reverse repo rate hike sooner rather than later.


Mridul Saggar, executive director of the RBI, said that high average crude oil prices can raise CPI inflation by 15-20 bps, adding that high average crude oil prices can lower growth by 13-15 bps.


“If crude oil prices (Brent crude oil December futures) remain high or even at or near $90 a barrel by the end of 2021 inflation is going to remain sticky,” said a dealer with a private bank.


“And if inflation remains sticky, the RBI, just like other central banks have started talking about tightening liquidity and reducing their extensive support, will have to take steps. There were expectations of a reverse repo rate hike and higher tenure VRRRs (variable rate reverse repo) anyway before the October policy and the RBI did not do either which was a pleasant surprise, but I reckon the central bank would undertake either or both of it in the December policy, given the current global view on rates.”


US Federal Reserve Chair Jerome Powell, in a virtual appearance on Friday, said that elevated US inflation readings were likely to last into next year and the central bank was alert to the risk that consumers would start expecting higher prices, which could prompt them to demand higher wages and lock in longer-lasting inflation.


He also said it was “time to taper” the Fed’s $120-bln monthly asset purchases. The Federal Open Market Committee will hold its next meeting on Nov 2-3.


Traders, thus were of the view that the concerns reflected by central banks seem to suggest that the central banks may be prompted to either move on interest rates earlier than expected or go for faster unwinding of the ultra-accommodative measures in place since early 2020, dealers said. 


While rates maturing up to three years were up, the five-year rate, already at a multi-month high, ended largely steady. The rate had soared tracking a sharp uptick in the US Treasury yields and crude oil prices of late. But both the US Treasury yields, and crude oil prices ended little changed on Monday from their previous close, thus leading OIS dealers to take calculative bets in the segment. 


Most dealers now expect the five-year rate consolidate around current levels now and only expect it to go up further if the US Treasury yields and crude oil prices rise more.



Swap rates may open on a mixed note on Wednesday. Short-term swap rates could witness further unwinding of received positions as traders look to build fresh paid positions on the view that short-term money rates may gradually inch higher.


However, after the recent volatility, traders may prefer to remain on the sidelines and look for cues on interest rates in the near term, before building fresh positions.


Any sharp movement in US Treasury yields and crude oil prices overnight might also lend cues at open.


The swap rate in the one-year segment is seen at 4.15-4.40%, and in the five-year at 5.55-5.75%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR



5-year MIFOR






US$1 = 74.96 rupees

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


Edited by Shirsha Thakur


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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