Informist, Wednesday, Dec 8, 2021
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates slumped as the Reserve Bank of India kept the reverse repo rate unchanged today, which led traders who were betting on a hike to unwind their paid fixed rate positions, dealers said.
The one-year swap rate ended at 4.23% as against the previous close of 4.29%, and the five-year swap rate ended at 5.31% compared with 5.36% on Tuesday.
On the day leading up to the policy announcement, OIS rates rose along with a surge in volumes as fear about the new COVID-19 variant Omicron impacting growth receded.
With data suggesting the Omicron variant was less severe than initially expected, traders placed bets that the RBI would continue with its path of policy normalisation including a reverse repo hike at the outcome of the Monetary Policy Committee meet today, dealers said.
However, the Monetary Policy Committee of the Reserve Bank of India voted 5 to 1 to continue with its accommodative stance and Governor Shaktikanta Das said policy accommodation would continue as the central bank seeks to support growth. Governor Das and Deputy Governor Michael Patra said that the nascent recovery would require the help of a benign policy.
Traders unwound their paid fixed rate bets after the decision and subsequently the one-month and two-month OIS rates slid 10 and 8 bps, respectively, as the view turned that the RBI could keep the rate unchanged even at the next policy review in February, dealers said.
“The tone of the policy is extremely dovish, I’m pretty sure I’m not the only one to tell you about no reverse repo hike in February because that’s what people have been discussing among themselves,” a dealer at a foreign bank said.
However, traders expected overnight bank rates to inch up even in the absence of the RBI normalising the interest rate corridor as it continued apace on its move to normalise and control the liquidity overhang, dealers said.
Governor Das announced plans that the RBI would increase the amount under the 14-day variable rate reverse repo auctions to 7.50 trln rupees by Dec 31. Further, the central bank also said from January, liquidity absorption will be undertaken mainly through the auction route.
With a large part of reverse repo operations seen untethered from the fixed rate reverse repo floor of 3.35% starting January, traders had begun betting that overnight interbank rates would be in line with the reverse repo when the RBI hikes the rate, dealers said.
“Omicron is likely to push back any tightening decisions by about a month, 45 days, as the impact is gauged which is one policy decision in the US cycle, so at least the RBI has laid the blueprint for the dovish hold with this policy,” a dealer at a private bank said.
“By the time the RBI decides to hike the reverse repo, the market may have already priced in higher market costs and there would not be a material effect on the rates at all,” the dealer said.
OUTLOOK
OIS rates may open steady on Thursday after the recent volatility.
Dealers may avoid large bets as they wait for more clarity on the new Omicron strain and its impact on the global economy.
Short-term OIS rates may fall further as dealers viewed the RBI’s commentary suggesting it would keep interest rates benign in the near term.
Any sharp movement in US Treasury yields and crude oil prices might lend cues at open.
The 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 = 75.45 rupees
Edited by Akul Nishant Akhoury
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