Informist, Monday, Mar 7, 2022
By Shubham Rana
NEW DELHI – Overnight indexed swap rates rose sharply across maturities as traders paid higher fixed rates noting a surge in crude oil prices to a 14-year high that stoked fears inflation will rise and the Reserve Bank of India will increase policy rates earlier than anticipated, dealers said.
The one-year swap rate settled at 4.54% against the previous close of 4.41% and the five-year swap rate closed at 5.92% against 5.81% on Friday.
While the five-year OIS surged due to a spike in Brent crude oil, the one-year swap rate rose as traders reassessed their views on rate hike for higher inflation may require intervention from India's central bank.
The sharp rise in triggers for imported inflation may prompt a hike in the repo rate as early as June, dealers said. Further, prices of commodities are under pressure as supply chains have been hit due to the ongoing war between Russia and Ukraine.
"With crude going up, inflation fears have increased. After policy (on Feb 10) people had expected the rate hike to be around October-November, now market thinks it will be earlier if crude remains elevated," said a dealer at a private bank said.
"The inflation target of 4.5% in 2022-23 (Apr-Mar) is not possible with crude being at $130-per-bbl."
Brent crude oil futures for May delivery topped the $139-per-barrel mark in Asian trade earlier today and stood at $125.39 per barrel at the end of Indian market hours, more than $7 per bbl higher than Friday's settlement.
India is particularly susceptible to imported inflation as the country imports almost 80% of its crude oil needs. This could push Consumer Price Index-based inflation out of the central bank's comfort band of 2-6%, dealers said.
Delays in return of Iranian crude oil to global markets and the US and the European Union imposing sanctions on Russia propelled crude oil prices.
Talks between Iran and the US to revive Iran's 2015 nuclear deal hit a snag on Sunday after Russia demanded written US guarantees that the sanctions it faces over the Ukraine conflict will not hurt its trade with Tehran.
In response to Russia's demands, US Secretary of State Antony Blinken said the sanctions imposed on Russia over its Ukraine invasion had nothing to do with a potential nuclear deal with Iran.
The US and its European allies are exploring a possible ban on imports of Russian oil, Blinken said on Sunday.
The jump in crude oil prices may threaten the Reserve Bank of India's projected consumer inflation targets, particularly the Apr-Jun estimate of 4.9%, if prices do cool down by the end of March quarter, dealers said.
OUTLOOK
On Tuesday, swap rates are seen steady, with traders expected to stay on the sidelines amid a lack of major domestic cues on interest rates.
They will also keep an eye on the geopolitical situation regarding Ukraine, particularly for the five-year overnight indexed swap rate.
Any sharp movement in US Treasury yields and crude oil prices might also lend cues in opening trade.
The swap rate in the one-year segment is seen at 4.20-4.45% and the five-year at 5.65-5.90%.
| At 1530 IST | Friday |
1-year OIS | 4.54% | 4.41% |
2-year OIS | 5.12% | 4.96% |
5-year OIS | 5.92% | 5.81% |
2-year MIFOR | 5.38-5.52% | 5.31-5.45% |
5-year MIFOR | 5.60-5.75% | 5.63-5.77% |
End
US$1 = 76.96 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Deepshikha Bhardwaj
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