Informist, Tuesday, Jul 26, 2022
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended off highs today as traders received fixed rates due to a moderating interest-rate view, despite a rise in crude oil prices. Corporate houses also received fixed rates in the five-year segment, leading to a sharper fall in the contract, dealers said.
The one-year overnight indexed swap rate settled at 6.27% as against 6.29% on Monday. The five-year swap rate ended at 6.43% against 6.47% the previous day.
The five-year OIS had earlier climbed to 6.49%, as crude oil prices rose about 2% on Monday due to persistent concerns about supply, and replacement demand to crude oil from natural gas in Europe as pipeline flows from Russia dwindled.
Brent crude oil for September delivery rose to $105.15 a barrel on Monday, and today traded near the $107-a-bbl mark at the end of Indian market hours. However, dealers avoided taking aggressive bets as Brent crude has remained in a narrow band between $102 and $108 in recent weeks.
Moreover, a corporate house that raised bonds today received fixed rates at elevated levels in the five-year swap rate to mitigate its interest rate exposure, dealers said.
Volumes across OIS tenures were limited on caution ahead of the US Federal Open Market Committee meeting outcome on Wednesday. The committee is expected to raise rates by 75 basis points, with some investors pegging a 100-bps increase as US CPI inflation has soared much above the Fed’s target.
Consequently, the corporate house also stocked up on government bonds maturing in around 10 years, dealers said.
“Banks are diverting client flows — both onshore and offshore — to pockets of the highest liquidity, as spread trades are out of favour now that bear flattening has occurred,” a dealer at a foreign bank said.
Paying pressure receded as traders bet on the Reserve Bank of India’s Monetary Policy Committee being more circumspect in hiking rates than the US rate-setting panel, to limit an economic downturn amid signals that inflation was easing, dealers said.
Since the last monetary policy review, two external members of the committee have highlighted concerns over the growth slowdown associated with the rate hikes. RBI Governor Shaktikanta Das last week said that inflation appeared to have peaked, echoing comments by Deputy Governor Michael Patra in June.
Therefore, domestic policy is unlikely to mirror the sharp rate hikes in the US over upcoming policy meetings beyond August. Traders are now of the view that the Indian rate-setting panel may favour pausing rate hikes in at least one of the remaining policy reviews in the current financial year ending March, dealers said.
The domestic rate-setting panel is still expected to hike the policy repo rate by 50 bps to 5.40% at the upcoming meeting next week, dealers said.
The five-year OIS had receded well below the 6.59% mark before the surprise off-cycle 40 bps rate hike on May 4, which was followed up by an anticipated 50 bps increase in June.
“Medium-term rate expectations have now come down, the five-year (OIS rate) is lower than it was before 90 basis points of repo rate hikes, because the global situation has changed so rapidly towards recession,” said a dealer at a primary dealership.
OUTLOOK
On Wednesday, swap rates are seen steady as traders may avoid large bets on caution ahead of the US Federal Open Market Committee’s meeting outcome after market hours.
The Fed’s rate-setting panel is expected to hike rates by 75 bps at the policy review, with outlying bets for a 100-bps hike.
Volatility in swaps may also be limited due to lack of significant domestic cues on interest rates ahead of India’s monetary policy review next week.
Any movement in US Treasury yields and crude oil prices may lend cues when the market opens.
The swap rate in the one-year segment is seen at 6.20-6.45%, and the five-year segment at 6.35-6.60%.
End
US$1 = 79.78 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Ashish Shirke
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