Informist, Friday, Dec 3, 2021
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended steady despite heavy trade, particularly in shorter-maturity swaps, ahead of the Reserve Bank of India’s upcoming policy review next week.
The market was split on the pace of policy normalisation that the RBI would undertake when its Monetary Policy Committee meets from Monday to Wednesday, and took divergent bets that cancelled each other out, dealers said.
The one-year swap rate ended at 4.27% as against the previous close of 4.26% on Thursday, and the five-year swap rate ended at 5.34% compared with the previous close of 5.33%.
Traders placed large bets in near-term swaps, which led to a spike in volumes of OIS rates maturing under a year. However, while some dealers paid fixed rates on the view that the RBI would hike the reverse repo rate in December, others received fixed rates betting that the central bank would stay pat in the face of the newly-discovered Omicron variant of COVID-19.
On the other hand, activity reduced in the one- and two-year swap rates, with dealers being of the view that the RBI’s policy actions would influence overnight rates over the next few months, while longer-maturity swaps had already priced in an equal quantum of overnight rates rising after the December meeting, dealers said.
“I wouldn’t say it (trade) was furious, it looked more like banks hitting large placements before the policy begins, and hit the first guy who would take the trade, going both ways (paying and receiving fixed rates),” a dealer at a private bank said.
Meanwhile, the five-year OIS rate also saw increased volumes but held steady. Domestic traders received fixed rates from overseas investors who looked to push swaps higher due to a persistent rise in crude oil prices today.
The Organization of Petroleum Exporting Countries and its allies continued their pace of hiking oil output at a key meeting on Thursday, which was seen as a signal that the cartel did not expect the Omicron strain to significantly dampen demand.
Brent crude futures for February settled below the psychologically-crucial $70/barrel mark on Thursday, but rose 2.7% to $71.58/bbl at the end of market hours. Even with the rise, crude prices at current levels were not a concern for higher imported inflation in the near term, dealers said.
“Crude is on the rise despite the decision to keep raising supply – it looks like the demand hit isn’t going to be as bad, at least according to OPEC themselves,” a dealer with a primary dealership said.
OUTLOOK
Swap rates are not traded on Saturday.
OIS rates may open steady on Monday due to caution before the outcome of the RBI’s policy review on Wednesday, with the market split on whether the central bank would hike the reverse repo rate in the face of the newly-discovered Omicron variant.
Dealers may keep to the sidelines, waiting for more clarity on the new strain and its impact on the global economy, especially as it continues to spread to different countries despite strict travel bans.
Meanwhile, US Federal Reserve Chair Jerome Powell’s comments on quicker-than-expected tapering of asset purchases may lead swap rates to rise in the near term. Traders had expected central banks globally to unwind monetary stimulus at a benign pace owing to the uncertain growth outlook.
Any sharp movement in US Treasury yields and crude oil prices might lend cues at open.
Swap rate in the one-year segment is seen at 4.10-4.35% and that in the five-year at 5.20-5.45%.
End
US$1 = 75.16 rupees
Edited by Snigdha Kuttikat
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Source: Cogencis
