Informist, Tuesday, Oct 12, 2021
By Nikhil Patwardhan
MUMBAI – Overnight indexed swaps ended on a mixed note today. The five-year swap rate fell after a recent surge as dealers unwound their fixed paid positions thinking the recent heavy paying in the five-year maturity segment, which led to the sharp rise in the five-year OIS, was overdone.
The one-year rate ended at steady at 4.05%, compared to 4.07% on Monday, and the five-year swap rate ended at 5.51% against the previous close of 5.56%.
The primary reason behind the sharp rise in the five-year rate was a surge in crude oil prices and US Treasury yields. Moreover, domestic gilt yields have risen in October, which made dealers pay heavily in the swaps market in a bid to hedge their gilts positions.
"(Brent crude oil December futures) Crude oil prices were up today again and comfortably above $80/bbl which is sparking fears of high inflation in the near-term," said a dealer with a private bank.
"US Treasury yield (10-year), too, remains above 1.60% but, I guess, still having factored in all of this, yesterday's (Monday's) paying (of fixed rates in the 5-year segment) was slightly overdone so some of it was unwound today. I think now until further triggers on the domestic front, or until oil prices or US yields further go up say beyond $85/bbl or 1.70%, the five-year rate will remain in a band of 5.45-5.60%."
The dealer's views were corroborated by many in the market who felt that heavy paying of fixed rates in the five-year OIS segment was overdone. The five-year OIS rate has risen nearly 20 basis points in October compared to a 4 bps rise in the one-year OIS.
However, overall trade in the swaps market today was low as dealers kept to the sidelines ahead of the release of the CPI inflation data for September, which will be out later today.
The CPI inflation data for September gains significance as it comes amid a sharp uptick in global commodity prices, led by crude oil. While the CPI inflation print is expected to drop sequentially for the fourth straight month in September, investors would be keeping an eye to see if the recent rise in commodity prices has an impact on the print.
As per an Informist poll of 19 economists, the CPI inflation for September falling to 4.5% in September from 5.30% in August.
The Reserve Bank of India at its monetary policy review last week, too, slashed CPI expectations for 2021-22 (Apr-Mar) by 40 basis points, erasing much of the upward revision it had announced in August.
The government, meanwhile, in its latest monthly economic review said that CPI inflation is expected to sustain its downward trajectory in the coming months, but warned that global crude oil price volatility would pose concern.
If the CPI inflation print for September reflects any impact of the recent rise in commodity prices, then the view on the timeline of policy normalisation would change again, dealers said.
Comments from top RBI officials at the presser last week prompted many dealers to believe that the RBI would go slow on tightening its ultra-loose policy. But if inflation stays sticky due to elevated commodity prices, dealers expect the central bank to take steps accordingly, thus changing the view on normalisation.
OUTLOOK
On Wednesday, OIS rates will take cues from the CPI inflation data for September which will be released later today.
Dealers would be keenly monitoring the print to see whether the recent rise in global commodity prices has affected the CPI print for September.
However, swap rates are expected to stay within a narrow range if the CPI print comes along expected lines due to recent volatility.
Any sharp overnight movement in crude oil prices and US Treasury yields 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 5.35-5.60%.
| At 1530 IST | MONDAY |
1-year OIS | 4.05% | 4.07% |
2-year OIS | 4.55% | 4.59% |
5-year OIS | 5.51% | 5.56% |
2-year MIFOR | 4.87-5.03% | 4.86-5.02% |
5-year MIFOR | 5.77-5.93% | 5.76-5.91% |
End
US$1 = 75.51 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Aditya Sakorkar
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