Informist, Thursday, Sep 30, 2021
By Nikhil Patwardhan
MUMBAI – Fear that the Reserve Bank of India may hike the reverse repo rate at its monetary policy review meeting scheduled next week saw overnight indexed swap rates soar today, with the one-year swap rate topping the 4% mark as dealers heavily paid fixed rates.
The one-year rate ended at 4.02% against 3.98% on Wednesday, and the five-year swap rate ended at 5.33% against the previous close of 5.32%.
The fear of a rate hike was fanned by reports that Citi expects the RBI to hike reverse repo rate by 15 basis points in the October policy.
“With the RBI allowing the sharp increase in the 7-day VRRR (variable rate reverse repo operation), the probability of upward adjustment in the reverse repo rate to normalise the corridor has increased materially,” said the Citi report, as quoted by some media.
The RBI on Tuesday set the cut-off at its seven-day variable rate reverse repo auction of 2 trln rupees at the highest possible rate of 3.99%, which led traders to believe the central bank might be hinting at nudging short-term rates higher, dealers said.
At the 170-bln-rupee Treasury bill auction on Wednesday, cut-offs rose 11-21 basis points from the previous week.
The one-year swap rate had been indicating a 40-60 bps hike in reverse repo rate, because typically, the 1-year OIS maintains a spread of 25 bps over the overnight cost of borrowing, which is currently near the reverse repo rate of 3.35% due to the abundance of liquidity in the banking system.
Moreover, the one-year swap rate is more prone to changes in the existing banking system liquidity. With the RBI stepping up its variable rate reverse repo operations in the last two weeks, some sections of the market expect the central bank to increase the tenor of such operations.
The shift in expectations comes as the US Federal Open Market Committee earlier this month hinted at a quicker-than-expected unwinding of its ultra-accommodative monetary policy measures. The market was earlier of the view that despite the elevated levels of surplus liquidity in the banking system, the RBI was unlikely to hike the reverse repo rate till at least December.
“The one-year rate has moved up sharply because of the actions of the RBI recently,” said a dealer with a primary dealership.
“They have indicated some sort of normalisation is what the market has read it as by setting the highest possible rate at the VRRR (Variable rate reverse repo) auction and so now there are fears that the inevitable reverse repo hike, which some initially believed would happen only in 2022, could well happen in October or December. Moreover, there are also fears of higher tenor VRRRs (variable rate reverse repo), which looks a more probable announcement in the policy.”
However, the five-year rate, which had surged nearly 20 bps over the last six days ended steady tracking crude oil prices and US Treasury yields, which steadied after having surged over the last five days. Dealers avoided large bets and volumes in the segment were low.
OUTLOOK
On Friday, OIS rates are expected to open steady as dealers may avoid large bets.
Rates are now seen in a narrow band in the near term due to the recent volatility in the run-up to RBI’s monetary policy meeting.
Any sharp movement in crude oil prices and US Treasury yields overnight may lend cues at open.
The swap rate in the one-year segment is seen at 3.90-4.10%, and in the five-year at 5.10-5.40%.
End
US$1 = 74.23 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Ashish Shirke
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Source: Cogencis
