India IRS Review:Up; one-year swap jumps on fear of sharp rate hikes

Informist, Monday, Oct 10, 2022


By Aaryan Khanna


NEW DELHI – Overnight indexed swap rates ended higher, with the one-year swap rising as overseas investors paid fixed rates fearing sharp domestic rate hikes, dealers said.


The one-year overnight indexed swap rate settled at 7.19%, against 7.09% on Friday. The five-year swap closed at 7.05%, against 6.97% the previous day.


Dealers were concerned that the Reserve Bank of India may resort to tightening monetary policy to protect the rupee's continued fall against the dollar, particularly as the US Federal Reserve was also expected to sharply hike policy rates for the rest of the year.


The rupee hit a fresh record low of 82.68 a dollar earlier today. After using its forex reserves to limit the fall in the domestic currency over the past few weeks, traders placed bets that the RBI would mull pushing up domestic interest rates on a similar trajectory to the US, dealers said.


"The run on the one-year swap is likely due to currency weakness," a dealer at a private bank said. "The RBI hasn't said anything on rate hikes, so nothing binds them from pursuing an interest rate defence if they want."


Domestic traders received fixed rates and capped the rise, particularly in near-term swap rates, on the view that the RBI's Monetary Policy Committee is unlikely to continue hiking rates beyond 7%, dealers said.


Meanwhile, the five-year swap rate also rose today tracking adverse overseas cues, with both US Treasury yields and crude oil prices rising overnight, dealers said.


The yield on the benchmark 10-year US Treasury note jumped 6 basis points on Friday to 3.89% after labour market data for September showed little signs of an economic slowdown, putting the Federal Reserve on track for aggressive rate hikes.


Meanwhile, Brent crude oil for December delivery jumped nearly 4% on Friday to settle at $97.92 a barrel after the Organization of the Petroleum Exporting Countries and its allies decided on an output cut.


"Nothing on the domestic front has changed, OIS rates are only factoring in the realities from overseas triggers such as crude and US yields, and that is likely to continue," a dealer at a foreign bank said. "CPI inflation (for September) at around 7.3% is not a concern, it's priced in."



On Tuesday, swap rates may open steady due to lack of fresh triggers on interest rates, dealers said.


Rates may be volatile in the run-up to the India and US CPI inflation data, due later this week.


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


The swap rate in the one-year segment is seen at 7.00-7.25%, and in the five-year segment at 6.90-7.15%.



At 1530 IST


1-year OIS



2-year OIS



5-year OIS



2-year MIFOR


5-year MIFOR





US$1 = 82.32 rupees

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


Edited by Tanima Banerjee



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