Informist, Monday, Oct 25, 2021
By Vaibhav Chakraborty
NEW DELHI – Up to three-year overnight indexed swap rates surged today as onshore and offshore traders unwound received positions on the view that central banks will tighten the gush of liquidity in the banking system, dealers said.
The one-year rate ended at 4.26% against 4.22% on Friday, while the five-year swap rate ended at 5.63% against the previous close of 5.61%.
Overnight cost of funds has gradually risen following aggressive cut-offs set by the Reserve Bank of India at its variable rate reverse repo operation. The weighted average call rate has risen by 13 basis points to 3.41% during the last one week, while the Mumbai Interbank Offered Rate has moved up by 6 bps during the same period.
Even though the RBI refrained from delivering a reverse repo rate hike in earlier this month, market participants say the rise in overnight cost of funds seems to indicate that the market has fairly priced in any future step by the central bank to normalise the Liquidity Adjustment Facility corridor.
Moreover, minutes of the Monetary Policy Committee’s meeting earlier this month also highlighted concerns of policymakers over global headwinds that could lead to imported inflation at a time when core inflation remains sticky at elevated levels, dealers said.
Mridul Saggar, executive director of the RBI, said high average crude oil prices could raise CPI inflation by 15-20 bps. High average crude oil prices could lower growth by 13-15 bps, he said.
Similar concerns over inflation were cited by US Federal Reserve Chair Jerome Powell in a virtual appearance on Friday. He said the elevated US inflation readings were likely to last into next year and the central bank was alert to the risk that consumers would start expecting higher prices, which could prompt them to demand higher wages and lock in longer-lasting inflation.
He also said it was “time to taper” the Fed’s $120-bln monthly asset purchases. The Federal Open Market Committee will hold its next meeting on Nov 2-3.
Traders are of the view that the concerns reflected by central banks seem to suggest that the central banks may be prompted to either move on interest rates earlier than expected or go for faster unwinding of the ultra-accommodative measures in place since early 2020, dealers said.
However, with the five-year swap rate already at a multi-month high due to the view on interest rates, a sharp rise in the US Treasury yields and crude oil prices, traders say there is limited scope to pay fixed rates in that segment.
They expect that the five-year swap rate is likely to consolidate around current levels until there are upside risks due to further rise in US yields and oil prices, dealers said.
OUTLOOK
Swap rates may open on a mixed note on Tuesday. Short-term swap rates could witness further unwinding of received positions as traders look to build fresh paid positions on the view that short-term money rates may gradually inch higher.
However, after the recent volatility, traders may prefer to remain on the sidelines and look for cues on interest rates in the near term, before building fresh positions.
Any sharp movement in US Treasury yields and crude oil prices overnight might also lend cues at open.
The swap rate in the one-year segment is seen at 4.15-4.35%, and in the five-year at 5.55-5.75%.
End
US$1 = 75.08 rupees
Edited by Avishek Dutta
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Source: Cogencis
