India IRS Review: Steady as US FOMC meet outcome on expected lines

Informist, Thursday, Sep 23, 2021


By Nikhil Patwardhan


MUMBAI – Overnight indexed swap rates ended steady because dealers avoided aggressive bets as the outcome of the US Federal Reserve's bi-monthly monetary policy meeting was largely on expected lines, dealers said.


The one-year rate ended at 3.88% against Wednesday's close of 3.87%, while the five-year swap rate ended at 5.16%, against the previous close of 5.14%.


The US Federal Reserve kept the federal funds rate target range unchanged at 0.00-0.25%, but warned it might soon need to reduce its assets purchases every month.


At the media briefing post the detailing of the monetary policy, US Federal Reserve Chair Jerome Powell hinted that tapering of asset purchases could begin as soon as in November. Meanwhile, more members of the US Federal Open Market Committee now expect the central bank to hike interest rates by 2022, bringing forward the timeline from 2023 as was projected earlier.


While the outcome was an upgrade from July, when the committee had said it would continue to assess progress made towards the employment and inflation goals in the coming meetings, US treasury yields did not react sharply as much of it was already digested by investors across the world. The yield on the 10-year US Treasury note ended at 1.32% on Wednesday, against the previous close of 1.33%.


"I believe some paying had happened in the morning especially due to an earlier-than-expected rate hike that the Fed announced and also with crude oil edging higher," said a dealer with a private bank.


"But then globally, I guess the view was that the policy was overall on the expected lines and so you did not see aggressive bets being taken overall. I see the (swap) rates staying in this 10 basis points band in the near-term at least till our policy in October."


Crude oil prices rose on Wednesday after crude oil stocks in the US, the world's largest consumer of crude, fell to their lowest level in three years. Moreover, signs of a pick-up in demand for crude bolstered prices. The Brent crude oil futures contract for November delivery ended nearly $2 higher and comfortably above the psychologically-crucial mark of $76.19/bbl. The contract rose further today and was last at $76.66 a barrel.


The rise in crude oil prices led some dealers to pay fixed rates, dealers said, as typically, a rise in crude oil prices poses upside risk to India's headline inflation and weakens the case for the RBI to continue its ultra-accommodative monetary policy for long. 


Most dealers are now waiting for the RBI's monetary policy meeting scheduled for early October. The central bank is not seen changing its accommodative stance and is expected to keep benchmark policy rates unchanged, now that the CPI inflation print over the last two months has fallen within the RBI's target band of 2-6%, dealers said.


The market expects the RBI to start normalisation of its ultra-accommodative policy only next year, with a hike in the reverse repo rate to begin with. However, if RBI Governor Shaktikanta Das hints at any normalisation by December, OIS rates would surge, as traders would then rush to heavily pay fixed rates anticipating rates to rise in the near term, dealers said.



On Friday, OIS rates will open steady as dealers may avoid large bets due to 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 5.10-5.35%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR



5-year MIFOR





US$1 = 73.64 rupees

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


Edited by Avishek Dutta


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