Informist, Thursday, Mar 3, 2022
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended on a mixed note with traders paying fixed rates in the five-year segment, tracking a jump in Brent crude oil futures, even as the contract ended off highs when prices eased towards the close of trade, dealers said.
The one-year swap rate settled at 4.38% against the previous close of 4.36% and the five-year swap rate closed at 5.82% against 5.79% on Wednesday.
The five-year overnight indexed swap rate rose to as much as 5.86% after the Organization of the Petroleum Exporting Countries and allies on Wednesday agreed to stick to a gradual increase in collective output by 400,000 bbl per day in April.
The perceived gap between expected supply and demand widened as Russia’s invasion of neighbour Ukraine entered its seventh day, with both countries being oil producers.
Brent crude oil futures for May delivery surged overnight to settle near $113-per-bbl. The contract hit a 10-year high of $119.84 in early trade today.
Typically, a rise in crude oil prices increases risk of imported inflation in India and provides less room for the Reserve Bank of India to prolong its monetary policy accommodation, particularly as the country imports almost 80% of its crude oil requirements.
However, the contract eased to $115.60 per bbl by the end of Indian market hours, likely due to some profit booking amid the surge in Brent crude oil prices by over $20 per bbl over the last week.
Domestic traders were keen to receive long-term swap rates on the view that the Monetary Policy Committee was likely to keep rates lower for longer, which pulled down rates as crude oil prices eased and overseas fixed rate bets fell towards the end of the day, dealers said.
“Some of it is obviously overseas paying, as our rates haven’t shot up as much because of the surge in crude, the domestic rate hike landscape still seems to be on a steady path rather than the RBI looking to muddy the waters,” a dealer at a primary dealership said.
Moreover, paying interest in domestic swap rates was limited as US Federal Reserve Chair Jerome Powell signalled a patient approach to hiking interest rates, which calmed investors and drifted them from safe haven assets. Powell said he was inclined to support a 25-basis-point rate hike in March, quelling some concern about the potential for a more aggressive rate hike.
Meanwhile, the one-year overnight indexed swap rate inched up on fears that inflation may rise in the near term due to a sharp spike in commodity prices, including those of crude oil, dealers said.
Brent crude oil prices have risen almost 30% since the central bank made its latest estimates public at the outcome of the Monetary Policy Committee meeting on Feb 10. The rise may threaten the projections for consumer inflation as early as March, dealers said.
On the other hand, traders avoided large bets as comments from policymakers, including from the Reserve Bank of India Governor Shaktikanta Das, indicated that the central bank was in no hurry to unwind policy accommodation as it looked to ensure the economy would chart a path to durable growth, dealers said.
“I think the short-term rates have risen too aggressively over the last couple of days. There are inflationary fears certainly across commodities, but I don’t think the RBI is in any mood to normalise quickly when everything points towards another economic shock due to this war,” a dealer at a foreign bank said.
OUTLOOK
On Friday, swap rates are seen steady, with traders expected to stay on the sidelines because of a lack of major domestic cues on interest rates.
They will also keep an eye on the geopolitical situation surrounding Ukraine for triggers, particularly in the five-year overnight indexed swap rate.
Any sharp movement in crude oil prices might also lend cues in the opening trade.
The swap rate in the one-year segment is seen at 4.20-4.45% and the five-year at 5.65-5.90%.
End
US$1 = 75.91 rupees
Edited by Deepshikha Bhardwaj
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