Informist, Monday, Oct 4, 2021

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady because dealers avoided aggressive bets on caution ahead of Reserve Bank of India's monetary policy meeting, which is set to begin on Wednesday.

Traders were unwilling to unwind paid fixed rate bets on the view that the RBI is likely to hint towards a timeline to begin policy normalising in a phased manner. However, the market right now is divided on whether the central bank will start with unwinding its ultra-accommodative monetary policy measures at the upcoming meet or will it wait for more progress on economic recovery front.

The one-year rate ended at 4.02%, flat against Friday's close, and the five-year swap rate ended at 5.35% against the previous close of 5.34%. This was the third straight day when the one-year swap rate remained above the psychologically-crucial 4%-mark.

"Unless there is either a sudden clarification as to where reverse repo or liquidity is going to go after policy, we're not going back below 4% (on the one-year OIS rate), there's no room to unwind if a reverse repo hike happens," a dealer at a primary dealership said.

Traders were concerned that the RBI's recent actions were pointing towards an earlier-than-expected normalisation of its accommodative policy, which was not in line with comments from officials, dealers said.

At its last round of seven-day variable rate reverse repo auction, the central bank set the cutoff at the highest possible rate of 3.99%, which traders interpreted as RBI's hint at nudging short-term rates higher.

Traders have already priced in a potential reverse repo rate hike of 15 basis points at the upcoming policy meet, especially after Citi concurred with the view in a note last week, dealers said.

Moreover, given the risk to financial stability from pumping additional liquidity in the banking system, the RBI may look to tweak its liquidity management playbook. The central bank could opt to increase the maturity of its variable rate reverse repo operations to up to 56 days from the current maximum tenure of 14 days at the outcome of its policy review, which would push up short-term rates and consequently lead to traders holding on to their paid fixed rate bets, dealers said.

Meanwhile, longer-term swaps were also steady as global cues did not move sharply over the weekend. While the easing of the yield on the 10-year US Treasury note below the 1.50%-mark on Friday prevented further paying of fixed rates, a corresponding rise in crude oil prices overnight did not allow for unwinding in the five-year OIS as well, dealers said.

"People have paid up strongly in both short- and long-end, one is because of the policy and the other is that the rise US yields and crude oil prices have been sticky at the current levels," a dealer at a private bank said.

OUTLOOK

On Tuesday, OIS rates are expected to open steady as dealers may avoid large bets.

Rates are now seen in a narrow band in the near term due to the recent volatility in the run-up to RBI's monetary policy meeting this week.

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

The swap rate in the one-year segment is seen at 3.90-4.10%, and in the five-year at 5.10-5.40%.

End

US$1 = 74.31 rupees

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

Edited by Shirsha Thakur

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