Informist, Wednesday, Jan 12, 2022
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates inched up as traders paid fixed interest rates on caution ahead of the release of key inflation data in both domestic and international markets.
India’s retail inflation in December rose to 5.59% from 4.91% in November, the government said in a release after market hours today. The US inflation print is scheduled at 1900 IST.
The median of an Informist poll of 22 economists had expected India’s retail inflation to surge to a six-month high of 5.8% in December, mainly because of a low base effect.
Some traders had today paid fixed rates in short-term swaps on the view the December print could top the upper limit of the central bank’s 2-6% comfort band, which may put pressure on the RBI to ramp up its current benign pace of policy normalisation.
“Some paying has come in from traders betting on a 6% figure or more, likely due to the pandemic-related inflation issues which have had the market concerned since Omicron began, but a large overshoot is unlikely in the December figure and will only show up in January,” a dealer at a primary dealership said.
The base effect will remain against CPI inflation readings in January, with the RBI forecasting inflation to peak in the Jan-Mar quarter.
Moreover, crude oil prices surged overnight aided by tight supply and hopes that rising COVID-19 cases and the spread of the new Omicron variant will not derail a demand recovery seen globally, leading traders to pay higher fixed rates in swap rates of longer maturities as well, dealers said.
Brent crude oil futures for March jumped 3.5% on Tuesday to settle at $83.72 per bbl. Typically, a rise in crude oil prices increases risks of imported inflation in India and provides less room to the RBI to prolong its monetary policy accommodation.
Dealers had been of the view that the RBI would support growth in the near-term and is unlikely to hike rates rapidly, unlike the US Federal Reserve. Analysts at Goldman Sachs, JP Morgan and Deutsche Bank predict the Fed will undertake four rate hikes of 25-basis-points each in 2022, dealers said.
Traders were concerned that a sustained spike in inflation may force the RBI to unwind accommodation at a faster pace than they had indicated earlier, to manage surging inflation as well as keep up with policy measures in developed economies, dealers said.
Late last year, the US Fed ramped up its pace of unwinding monetary policy accommodation to combat a jump in retail inflation, which rose to a four-decade high in November.
Traders also awaited the US CPI inflation data for December and its impact on US Treasury yields, dealers said.
Speaking in front of the US Senate as a part of his re-nomination process as Federal Reserve Chair, Jerome Powell suggested that the first interest rate hike by the central bank will be around March, in line with the market’s expectation.
Powell also said he expected the economic impact of Omicron variant of COVID-19 to be short-lived, with a “long road” to anything close to restrictive policy.
“US yields are currently in check, but they’re in a volatile range between 1.71-1.80% (on the 10-year US Treasury note) and crude is significantly higher overnight, so even the five-year OIS saw some paying towards the end before the US data,” a dealer at a foreign bank said.
OUTLOOK
Swap rates may open lower on Thursday as traders unwind their paid fixed rate positions after India’s CPI inflation rate was lower than what the market expected.
Retail inflation in December rose to 5.59% from 4.91% in November, but was below the median estimate of 5.8% in an Informist poll of 22 economists.
Swap rates may take further cues from the US December CPI print, which will be released at 1900 IST.
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
Edited by Maheswaran Parameswaran
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