Informist, Wednesday, Jan 5, 2022
By Vaibhav Chakraborty
NEW DELHI – The overnight indexed swap rate ended steady after a day of choppy trade because traders were cautious amidst mixed cues on interest rates as the Omicron variant of coronavirus is spreading rapidly.
Traders believe that while global central banks could look to shrug off the rapidly rising coronavirus cases, to pursue their unwinding of the monetary policy stimulus in a bid to tackle the elevated inflation, the Reserve Bank of India can maintain an accommodative stance to ensure limited impact on economic recovery amid a surge in cases, dealers said.
With the US Federal Reserve expected to wind up its asset purchase tapering by March to set the floor rates, traders believe that offshore clients may prefer to pay fixed interest rates on the view that interest rates are likely to rise this year, dealers said.
For now, the market expects the US central bank to at least hike rates thrice in the current year to tackle inflation that hit a four-decade high, with the CME FedWatch Tool already indicating the possibility of a 25-basis-point rate hike in March itself.
Moreover, the Federal Open Market Committee’s median dot at the December meeting already had suggested three rate hikes this year.
The one-year swap rate ended at 4.37% against the previous close of 4.38%. The five-year swap rate ended at 5.56% against Tuesday’s close of 5.54%.
“The way things are changing in terms of cases, it is making a case for the RBI to stay put and see how the (third) wave is going to play out but globally central banks may continue with their tightening as per plans,” a dealer with a primary dealership said. “It’s not like our growth picture was very good even before the pandemic, so the RBI could well be right to exercise caution and for headline purposes refrain from any hikes in February,” the dealer said.
On the domestic front, traders expect the rapidly rising cases and consequent restrictions being imposed by authorities to lead to a dip in economic activity, dealers said.
The RBI which has maintained its accommodative stance to ensure economic growth is sustainable could be cautious in hiking the reverse repo rate in February if the situation with COVID-19 becomes adverse, dealers said.
“The MPC (Monetary Policy Committee) is unlikely to change the accommodative stance to neutral in the Feb policy, given Omicron-related risks, but April policy could be an appropriate time, assuming the ongoing third wave has subsided meaningfully by then, with limited economic impact,” Kaushik Das, India chief economist, Deutsche Bank, said in a note on Tuesday.
Meanwhile, some traders were of the view that the rise in the five-year segment seems to be overdone as they expect the segment to consolidate between 5.50-5.55% range till there are significant cues on interest rates, dealers said.
OUTLOOK
Swap rates are likely to open steady on Thursday because traders may stay on the sidelines due to a lack of significant cues.
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 4.30-4.55% and the five-year at 5.40-5.65%.
End
US$1 = 74.36 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Michael Correya
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