Informist, Friday, Jun 3, 2022

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended on a steady note amid muted volumes as traders kept to the sidelines on caution ahead of the upcoming Monetary Policy Committee meeting next week.

The one-year swap rate ended at 6.23% against the previous close of 6.22%, while the five-year swap rate closed at 7.04%, flat against the close on Thursday.

The rate-setting panel is expected to hike the policy repo rate by 50 basis points to 4.90%, which the market had factored in following the off-cycle rate hike in May and retail inflation surging to a near eight-year high in April.

Short-term rates remained elevated as traders waited for policymakers' comments on the pace of rate hikes moving forward before placing fresh bets. While the market broadly expected the MPC to frontload rate hikes, participants were uncertain about the pace of policy tightening once the repo rate was brought to the pre-pandemic level of 5.15%, which is expected by August.

Following the policy, the cash reserve ratio is seen unchanged at 4.5% of net demand and time liabilities, after the RBI increased the mandated limit by 50 bps in May to draw down durable liquidity.

"As you can see, the market was quite placid today, with not too many spillovers as we head into the MPC meet with (swap) rates factoring in a very steep jump in the policy rate," a dealer at a foreign bank said.

Despite concerns by some traders that short-term rates were too high, dealers were unwilling to unwind their paid fixed rate bets before the policy decision on Wednesday.

Early in the day, the five-year OIS had inched up tracking a rise in crude oil prices as demand increases were seen outpacing supply increases by the Organization of the Petroleum Exporting Countries.

Brent crude for August delivery rose over 1% on Thursday, and traded over $117.50 a bbl in Asian trade today. Later on, the contract reversed gains and ended the day firmly below the key $117-a-bbl mark. 

In the run up to the policy, some traders also chose to ignore daily movements in crude prices as the RBI is likely to have already decided on the actions it would take to curb inflation, dealers said.

"It's important for crude to remain under $120-a-bbl, which is the figure at which the RBI begins to panic on prices, in my view, and the adverse crude prices will not make for pretty commentary at the review, even from (RBI Governor Shaktikanta) Das," a dealer at a primary dealership said.

OUTLOOK

OIS rates are not traded on Saturday.

On Monday, swap rates are seen steady due to a lack of fresh triggers for interest rates ahead of the Monetary Policy Committee meeting.

RBI Governor Shaktikanta Das will detail the outcome of the meeting on Wednesday. Traders expect the panel to hike the policy repo rate by 50 basis points to 4.90%, while keeping the cash reserve ratio steady at 4.5% of net demand and time liabilities.

Any sharp movement in crude oil prices and US Treasury yields might lend cues when the market opens.

The swap rate in the one-year segment is seen at 6.00-6.30%, and the five-year at 6.85-7.10%.

End

US$1 = 77.62 rupees

Edited by Michael Correya

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