India IRS Review: Inch lower as crude oil retreats from 3-year highs

Informist, Wednesday, Sep 29, 2021


By Nikhil Patwardhan



MUMBAI – Overnight indexed swap rates inched lower, after having surged over the last three sessions, as a fall in crude oil prices from three-year highs led dealers, who shrugged off the sharp overnight rise in US Treasury yields, to unwind their fixed paid positions, dealers said.


The one-year rate ended at 3.98% against Tuesday's close of 3.99%, while the five-year swap rate ended at 5.32%, as against the previous close of 5.35%.


The one-year rate had surged 11 basis points over the last three sessions, while the five-year rate had gone up 19 basis points. Swap rates had surged tracking a sharp rise in crude oil prices, which were trading near three-year highs and US Treasury yields that had hit a near three-month high on Tuesday. 

After rising sharply for five consecutive days, crude oil prices ended lower on Tuesday. The Brent crude oil futures contract for November delivery had surged to an intraday high of $80.75/bbl on Tuesday due to concern over demand-supply mismatch. But the futures contract ended lower at $79.09 on Tuesday. 


While the contract fell further to $78 a bbl today, it was still at near three-year highs as traders were wary of the concern over demand-supply mismatch, which could pose inflationary pressures across the globe.


The recent rise in crude oil prices could make it trickier for the Reserve Bank of India to continue with its ultra-loose monetary policy stance, as high oil prices lead to imported inflationary pressures in large consumers of crude such as India. The RBI's Monetary Policy Committee will meet in early October to review the monetary policy.


Meanwhile, US Treasury yields hardened for the fourth straight session on Tuesday as a drop in COVID-19 cases, coupled with sticky inflation outlook for the near-term weighed on the minds of investors. The 10-year US Treasury yield surged 6 bps to settle at 1.54% on Tuesday.


Moreover, investors were worried about a tighter monetary policy, with US Federal Reserve Chair Jerome Powell indicating that the central bank may start reducing asset purchases as early as November. Investors now fear higher interest rates next year. However, the yield fell today, which led to some unwinding, dealers said. 


"The intraday fall in crude oil prices and US yields did provide some relief to domestic gilts, and in swaps, traders were looking to unwind after having heavily paid fixed rates over the last two-three sessions," said a dealer with a primary dealership.


"I believe the five-year rate could still track movement in crude oil prices and the US treasury yields from here but the one-year rate should consolidate ahead of the RBI policy."


Some traders opted to pay fixed rates in swaps maturing in three and six months, noting the RBI's move to set a sharply higher-than-expected cutoff at its seven-day variable rate reverse repo operation on Tuesday, dealers said. The central bank had tendered 2 trln rupees under its 7-day variable rate reverse repo operation. Today, traded volumes in the 3-month maturity OIS were the highest with the total traded amount of 105 bln rupees.


With the RBI setting the cutoff at 3.99%–closer to repo rate of 4%–some traders believed that the central bank may have hinted towards higher short-term rates ahead of the eventual hike in the reverse repo rate, dealers said. The cutoff was aggressive as it was sharply above the weighted average rate of 3.61%.


The move prompted dealers to demand a high yield at the Treasury-bill auction as well. The cutoff yields set by the RBI on the 91-day, 182-day and the 364-day T-bills were 11, 15 and 21 basis points higher, respectively, from the previous week's cutoffs.



On Thursday, OIS rates will open steady as dealers may avoid large bets due to the 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%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR



5-year MIFOR






US$1 = 74.15 rupees


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


Edited by Mainak Moitra


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