Informist, Thursday, Dec 2, 2021
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates were steady as traders avoided aggressive bets in the run-up to the Reserve Bank of India’s policy review next week.
The one-year swap rate ended at 4.26% as against the previous close of 4.25% on Wednesday, and the five-year swap rate ended at 5.33% compared with the previous close of 5.34%.
The market was split on the pace of policy normalisation that the RBI would undertake when its Monetary Policy Committee meets on Dec 6-8, dealers said.
Swaps traded in a thin band due to the uncertainty surrounding the newly-discovered Omicron variant of COVID-19 and how much impact it would have on the central bank’s decision making, dealers said.
Some dealers were of the view that a hike in the reverse repo rate by 15-20 basis points was unlikely to hinder a pickup in growth impulses. It would also begin a much-needed pullback of pandemic-era emergency measures by the central bank, which was the prime concern in the face of the new COVID strain, dealers said.
“While we have maintained that the RBI would continue to be accommodative and not hike the reverse repo till February, there is still upward pressure on OIS before the policy is announced on Wednesday,” a dealer at a foreign bank said.
Further, traders avoided large bets due to a lack of significant cues, with traders having unwound their paid fixed rate bets in recent days due to benign overseas cues, dealers said. The yield on the 10-year US Treasury note settled at 1.43% for the second day on Wednesday, which was the lowest close since late September.
Investors continued to stock up on haven assets due to the spread of the Omicron variant worldwide, including the first reported case in the US on Wednesday.
The threat of movement restrictions and the associated fall in demand from a negative growth impact of the new strain also weighed on crude prices, which settled marginally lower on Wednesday. However, the Brent crude oil futures for February rose to the $70/bbl mark before the outcome of a key meeting of the Organization of Petroleum Exporting Countries and its allies.
The level was little changed from the price during Indian market hours on Wednesday, and had been factored into domestic swap rates, particularly those of longer maturities, dealers said.
“Plenty of paid positions have been unwound recently because of the fall in US Treasury yields and crude, and with no real movement on the global front even the paying interest – which is there at these levels – is muted,” a dealer at a private bank said.
OUTLOOK
Swap rates may open steady on Friday on caution before the RBI’s Dec 6-8 policy review, with the market split on whether the central bank would hike the reverse repo rate in the face of the newly-discovered Omicron variant of COVID.
Dealers may keep to the sidelines, waiting for more clarity on the new strain and its impact on the global economy, especially as it continues to spread to different countries despite strict travel bans.
Meanwhile, US Fed Chair Jerome Powell’s comments on a quicker-than-expected taper of asset purchases may lead to swap rates rising in the near term. Traders had expected central banks globally to unwind monetary stimulus at a benign pace owing to the uncertain growth outlook.
Dealers also eyed cues from the outcome of a key meeting of the Organization of Petroleum Exporting Countries and its allies. The cartel was expected to pause hiking supply of crude due to the recent slump in prices and a muted demand outlook for the commodity.
Any sharp movement in US Treasury yields and crude oil prices might lend cues at open.
Swap rate in the one-year segment is seen at 4.10-4.35% and that in the five-year at 5.20-5.45%.
End
US$1 = 74.99 rupees
Edited by Maheswaran Parameswaran
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