Informist, Friday, Jan 7, 2022
By Vaibhav Chakraborty
NEW DELHI – Overnight indexed swap rated ended on a mixed note today. The five-year swap rate retraced below the crucial 5.60% mark because domestic traders felt that the recent paying of fixed interest noting the surge in US Treasury yields and crude oil prices was overdone, dealers said.
Five-year swap rates had surged by 25 basis since the beginning of the year as traders have paid fixed rates following the jump in US Treasury yields as the US Federal Reserve is set to tighten financial conditions at a faster pace to tame multi-decade high inflation, dealers said.
Minutes of the US Federal Open Market Committee’s December meeting, released on Wednesday, concurred with the market’s view, with officials suggesting that the central bank could start reducing its overall asset holdings at a much faster pace and set the floor for a lift-off in interest rates.
However, traders say that even if central banks of developed markets look to tighten their monetary policy in a haste, the Reserve Bank of India is likely to tread with caution and stick to a gradualism approach to support the economy.
“There are two narratives running the show in swaps these days on one hand the offshore guys (cliets) are looking to pay as US Fed is expected to tightening things at a much faster pace, but domestically if we look at the way cases are rising I feel that RBI could take its foot of pedal or at least ease down a bit,” a dealer with a primary dealership said.
“The rise in 5-year was seen overdone since Wednesday when it breached 5.52%, if UST stabilises in the 1.70-1.80% range then I think we should be back to sub 5.55%.”
The one-year swap rate ended at 4.38%, flat against the previous close, while the five-year swap rate ended at 5.58% against Thursday’s close of 5.62%.
With new cases of COVID-19 topping 100,000 in the past 24 hours–the highest since Jun 5–and states proactively imposing restrictions to limit the spread of the virus, the RBI may ease the recent tightening of financial conditions it has necessitated through liquidity management operation, dealers said.
Traders were of the view that the central bank will stick to its growth supportive narrative in the monetary policy meeting next month as the restrictions imposed are likely to halt contact-sensitive economic activity, leading to a slowdown in growth, dealers said.
In recent weeks, several economists and analysts have scaled down their growth projections for Jan-Mar as the rapidly surging cases of coronavirus are likely to impact economic activity.
Considering that the RBI is likely to remain focused on growth, current levels on the 5-year swap rate were elevated and thus, provided room for traders to unwind their paid bets today, dealers said.
OUTLOOK
Overnight indexed swaps are not traded on Saturdays.
Swap rates are likely to open steady on Monday because traders may stay on the sidelines due to 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 5.55-5.80%.
End
US$1 = 74.31 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Avishek Dutta
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Source: Cogencis
