India IRS Review: Rise as RBI ambiguous on policy stance longevity

Informist, Wednesday, Apr 7, 2021


By Vaibhav Chakraborty


NEW DELHI – Overnight indexed swap rates surged today as market participants paid fixed interest rates on the view that the Reserve Bank of India refrained from explicitly outlining the longevity of its accommodative monetary policy stance, dealers said. 


The one-year swap rate ended at 3.84%, compared with 3.79% on Tuesday, while the five-year OIS rate settled at 5.21% against the previous close of 5.17%.


Heading into the policy, swap rates had witnessed an unwinding of paid fixed positions on the view that the RBI may prolong its monetary policy accommodation following the recent spike in coronavirus cases that could derail the nascent economic recovery, dealers said.


However, market participants were left disappointed as RBI Governor Shaktikanta Das said, "juxtaposition of high frequency lead and coincident indicators reveal that economic activity is normalising in spite of the surge in infections".


According to the RBI's growth projection, India's GDP is expected to growth at 10.5% in 2021-22 (Apr-Mar), which was in line with its February projections.


Meanwhile, the central bank also projected CPI inflation to remain above 5.0% at the end of the current financial year, pegging it at 5.1% in the fourth quarter.


Moreover, the central bank also moved to state-based guidance on the monetary policy stance instead of a time-based guidance as Das said that it was too early in the current financial year.


Participants were hopeful that even if the central bank does not cut interest rates, it was likely to provide a market supportive guidance on prolonging its accommodative monetary policy stance and the surplus liquidity in the banking system amid concern over economic growth due to the surge in COVID-19 cases, dealers said  


"There were two things that impacted the OIS. While bond yields have come down due to the bond buying programme announcement, the policy per se is not as dovish as it was expected to be," said a senior dealer with a private bank. "The governor was quite confident on growth return and there were some inflation concerns being voiced, and at the same time there weren't any undue worries on the second wave of COVID. Overall the policy was not interest rate friendly."


Market participants were also disappointed as the Reserve Bank of India announced variable rate reverse repo operations for longer maturity papers, dealers said. This move was perceived to be a signal that the Reserve Bank of India was uncomfortable with high surplus liquidity in the banking system, dealers said.


Moreover, sharp depreciation in the rupee against the dollar also led participants to pay fixed interest rates, dealers said.


Depreciation in the rupee eats into fixed-income earnings and typically prompts offshore market participants to pay fixed rates in the OIS market, dealers said.


"The rupee depreciation post RBI policy also led to paying. Generally we have witnessed that whenever there is pressure on currency the OIS gets paid in terms of an insurance that people like to buy against the bonds," the senior dealer said.



Swap rates may open higher on Thursday as market participants may pay fixed interest rates due to the lack of an explicit guidance on the longevity of the RBI's monetary policy accommodation stance.


Any sharp overnight movement in crude oil prices and US Treasury yields may lend cues at open. 


The swap rate in the one-year segment is seen at 3.70-3.90%, and that in the five-year segment at 5.10-5.30%.



At 1530 IST


1-year OIS


2-year OIS



5-year OIS


2-year MIFOR


5-year MIFOR





US$1 = 74.55 rupees


IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Edited by Mainak Moitra


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