 "OIS rates at near term peak; uncertainty around rate view continues")
India’s overnight indexed swap (OIS) rates might be at their near-term peaks as traders do not expect any rate action by the domestic rate-setting panel, dealers said. However, traders feel that the Reserve Bank of India might continue to leverage liquidity conditions in its fight against inflation.
While the one-year OIS rate has been technically reflecting a 25 basis points (bps) hike by the Monetary Policy Committee, market participants believe that it may fade soon. Discussions about potential rate cuts in the second quarter of the next financial year have also lost momentum.
Overnight indexed swaps serve as fixed-income financial instruments in India, functioning as a key method for anticipating the direction of future interest rates and acting as the primary means to mitigate interest rate-related risks.
“Right now, the market is not trading on the basis of rate view; everyone is on the trading side. Nobody knows how this climate is going to work out in September. Nobody knows how the US data will be this week. So, there are lots of uncertainties. So, today (Tuesday) also, despite the US yield being on the lower side, we closed almost flat in the five years (5-year OIS),” a dealer at a primary dealership said.
“Rate cut expectation is not visible, and the rate hike expectation that was there is now fading away. Earlier, it was there. But now, the market is expecting whatever measure will be taken, it may be taken from the liquidity plan, unless and until there is a drastic increase in inflation or something happens in the inflation trend,” he added.
The shorter end of swap rates had started pricing in a 25 bps hike after the domestic headline inflation rate surged in July, and rate cut expectations were pushed back. Consumer inflation surged to a 15-month high of 7.44 per cent in July.
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Moreover, the imposition of the incremental cash reserve ratio (I-CRR) by the RBI aided short-term rates.
“The money market rates have already been 25 basis points or more above the repo rate. So if you continue to tighten liquidity like this, then it is as good as hiking rates by 25 bps. The market is also flipping in the same way,” another dealer said.
The one-year and five-year swap rates ended flat on Tuesday at 6.99 per cent and 6.60 per cent, respectively.
“The RBI is not going to hike [rates], but it depends on the US Federal Reserve. One hike is already priced in. However, if they indicate more hikes, then the market will start pricing in a fresh rate hike cycle,” the dealer said.
US Federal Reserve Chair Jerome Powell had on Friday expressed the central bank’s commitment to align inflation with its 2 per cent inflation target by maintaining a restrictive policy. However, the markets remained little changed following the remarks.
“Everything from here should be data-dependent. There is no clear view. A rate cut is not on the trading cards for now. People are trading for booking profits. The market lacks clarity,” a dealer at a private bank said.