Informist, Thursday, Jan 13, 2022
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended on a mixed note, with traders unwinding paid fixed rates after the December CPI inflation print was lower-than-expected, dealers said.
The one-year swap rate ended at 4.37% against the previous close of 4.41%, while the five-year swap rate ended at 5.58% against Wednesday’s close of 5.59%.
Data released after market hours on Wednesday showed that India’s retail inflation rate based on CPI (Combined) rose to 5.59% in December from 4.91% a month ago. An Informist poll of 22 economists had pegged the headline inflation rate for December at 5.8%.
Traders that had paid fixed rates on Wednesday on fears that inflation may overshoot the target, unwound the bets they had taken, particularly in short-term swap rates, dealers said.
With the reading within the RBI’s 2-6% comfort band, the central bank was likely to maintain its benign pace of unwinding policy accommodation.
Further, the lack of a four-day variable rate reverse repo auction today added liquidity available to the market, pulling swap-rates maturing up to two years lower as overnight money market rates eased, dealers said.
“There is no material change on policy view after CPI, the one-year swap is correctly reflecting three rate hikes, with the repo rate at 4.75% by the last quarter of the next fiscal,” a dealer at a private bank said.
Moreover, the RBI announced after market hours that it would conduct a 14-day, 5-trln-rupee variable rate reverse repo auction on Friday.
Unexpectedly, the quantum was lower than a similar auction on Dec 31, when the central back notified it would mop up 7.5 trln rupees via the measure.
Some dealers speculated that the RBI may be less aggressive in mopping up liquidity as it seeks to remain supportive of growth due to the uncertain impact of the ongoing third wave of the COVID-19 pandemic in the country.
On the other hand, the five-year OIS rate eased as traders unwound paid bets they had taken on caution before the US CPI print on Wednesday, but surging crude oil prices limited the fall, dealers said.
Brent crude oil futures for March rose 95 cents per barrel to settle at $84.67 per bbl on Wednesday due to tight supply as crude inventories in the US fell to their lowest since 2018.
The Energy Information Administration on Wednesday said that the US crude inventories fell 4.6 mln barrels in the week ended Friday to 413.3 mln barrels, lowest since October 2018. Analysts in a Reuters poll had forecast a 1.9-mln-barrel drop.
Meanwhile, the yield on the 10-year benchmark US Treasury note ended largely steady on Wednesday after the US Labor Department on Wednesday said the consumer-price index rose 7% in the 12 months through December, the fastest pace since 1982.
In November, the on-year reading of 6.8% had prompted the Federal Open Market Committee to accelerate the pace of the central bank’s asset purchase taper, with the programme set to wind up by March instead of at the end of June.
The latest US inflation data showed price pressures surging, but within expectations, suggesting that any further tightening measures were unlikely. Policymakers in recent days including Federal Reserve Chair Jerome Powell have suggested interest rate hikes could begin as early as mid-March.
“Crude remains elevated, so it’s not like everyone is willing to receive the five-year swap, but paid positions before policy were dealt with to a large extent since there were no surprises and (US) yields didn’t move much,” a dealer at a foreign bank said.
OUTLOOK
Swap rates are seen steady on Friday as traders may keep to the sidelines due to a lack of significant cues for interest rates.
Short-term swap rates may fall after the RBI announced a lower-than-expected quantum for its 14-day variable rate reverse repo auction on Friday.
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 Shirsha Thakur
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