Informist, Monday, Sep 27, 2021
By Nikhil Patwardhan
MUMBAI – Overnight indexed swap rates rose today because traders paid fixed rates following a sharp rise in crude oil prices and US Treasury yields.
The one-year rate ended at 3.96% against Friday’s close of 3.92%, while the five-year swap rate ended at 5.33% against the previous close of 5.25%.
Yields on US Treasury notes jumped further on Friday, after having surged on Thursday as the US Federal Reserve’s decision to start tapering its massive bond purchases, which Chair Jerome Powell said could well begin as early as November, prompted dealers to reprice their portfolios as they fear higher interest rates next year.
Yield on the 10-year US Treasury note rose 6 basis points to settle at 1.47%. The yield has surged 15 bps over the previous two sessions. Today, the yield further rose and was last at 1.48%. A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing for foreign investors.
Meanwhile, crude oil prices soared on Friday, extending gains for the third consecutive weeks, and traded near three-year highs. Global output disruptions, which have forced energy companies to pull large amounts of crude oil out of inventories, led to the rise in prices. The Brent crude oil futures contract for November delivery gained over $1 to settle at $78.09/bbl. Today, the contract gained further and was very close to the psychologically crucial mark of $80/bbl. It was last at $79.22/bbl after having hit an intraday high of $79.52 a barrel.
Typically, a rise in crude oil prices increases upside risks to inflation in India and gives less room to the Reserve Bank of India to prolong its monetary policy accommodation.
“Both US yields and crude oil prices have surged due to strong fundamental reasons after a long time,” said a dealer with a private bank.
“Till now we were not seeing the movements (of crude oil and US yields) affecting swap rates much because there was not a shift in the view on rates as such. Now, it looks like there’s a shift in view on rates in the near-term and high crude prices are just going to make it worse, so I guess, OIS rates might rise from here on, definitely above the band in which they were trading for the last two months.”
The sharp rise in crude oil prices and US Treasury yields comes just ahead of the RBI’s bi-monthly monetary policy review meeting scheduled early October. While the Monetary Policy Committee is expected to keep the benchmark policy rates unchanged, RBI Governor Shaktikanta Das’ comments on inflation would be closely monitored considering inflation to remain sticky with oil prices edging higher, dealers said. India is the third-largest consumer of crude and thus high crude oil prices put imported inflationary pressures.
The one-year OIS rate is trading very close to the benchmark repo rate of 4%, and dealers expect it to stay within a band of 3.90-4.00% in the run-up to the RBI’s monetary policy review as the market is awaiting any hints whether the central bank would hike the reverse repo rate in the near-term, which could then lead to a sharp rise in the one-year rate.
Currently, the one-year swap rate indicates a 40-60 bps hike in reverse repo rate, as typically the 1-year OIS maintains a spread of 25 basis points over the overnight cost of borrowing, which is the reverse repo rate of 3.35% due to the abundance of liquidity in the banking system.
Moreover, the one-year swap rate is more prone to changes in the existing banking system liquidity. With the RBI stepping up its variable rate reverse repo operations in the last two weeks, some sections of the market expect the central bank could look increase the tenor of such operations.
Meanwhile, several analysts believe that the central bank could also look to narrow down the gap between the reverse repo rate and repo rate by the end of calendar year, by hiking the former, dealers said.
OUTLOOK
On Tuesday, OIS rates will open steady as dealers may avoid large bets due to lack of significant domestic cues on rates.
Rates are now seen trading in a narrow band in the near term, in the run-up to the RBI’s monetary policy meeting scheduled for early October.
Any sharp movement in crude oil prices and US Treasury yields overnight may lend cues at open.
The swap rate in the one-year segment is seen at 3.80-4.00%, and in the five-year at 5.10-5.40%.
End
US$1 = 73.84 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Akul Nishant Akhoury
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