Search

Indian rate swaps ease in thin trade on yields, oil

Reuters - Saturday, July 4

MUMBAI, July 3 - Indian overnight indexed rate swaps eased for a second straight day on Friday, tracking lower bond yields and oil prices, but traders said volume was low as market players awaited Monday's budget for a clearer picture.

"There was not much action happening in the OIS, it just followed the bond market," said a dealer at a foreign bank.

The benchmark five-year swap rate <INROIS> ended at 6.13/18 percent, below previous close of 6.20/24 percent.

The yield on the most traded 7.94 percent bond maturing in 2021 <IN079421G=CC> closed at 7.02 percent, below Thursday's closing of 7.12 percent on expectation the government's final borrowing target may not be as high as earlier expected.

An overnight rally in U.S. bond prices and lower crude prices also might have prompted investors to receive fixed-rate swaps, traders said.

Bond traders say the recent fuel price hike and remarks in the economic survey on Thursday pointed to the government's efforts to improve its finances and reduce its widening fiscal deficit which was at 6.2 percent in 2008-09.

Finance Minister Pranab Mukherjee will outline the government's borrowing amount for the fiscal year ending March 2010 in the federal budget on Monday and swaps traders are staying on sidelines until then.

A smaller-than-expected hike in the the market borrowing won't push up bond yields as much as traders earlier expected, bringing down the demand for swap rates to hedge rate risk.

The government in a survey on Thursday called for stake sales in state-run companies to generate 250 billion rupees annually, reform of fertiliser and food subsidies and an auction of third-generation mobile phone spectrum. See [ID:nISL519488]

Some market players also expect the central bank to cut key rates in its policy review on July 28 before it takes a pause, given the likelihood of poor monsoon impacting growth.

"If the monsoons fail in July, the RBI might cut interest rates by another 25 basis points in its policy announcement on July 28 as an insurance against growth," Indranil Pan and Kaushik Das, economists at Kotak Mahindra Bank, wrote in a note.

But, in the medium-term, yields may head north as economic activity is seen picking up, fuelling inflation and an end to the central bank's easy monetary policy, traders said.

The RBI might move to a neutral zone or moderately hawkish stance by end-December to prepare the markets for a reversal in easy monetary policy, Kotak Mahindra Bank said in the note.

At close, total volumes in swaps were at 5.5 billion rupees in the central bank's platform.

Sign in to recommend this article »
0 users recommend

Related Articles: Business