India IRS Review: Rates down on sharp fall in US ylds, crude oil

Friday, May 24


By Bhaskar Dutta


NEW DELHI – Overnight indexed swap rates fell today because of a steep decline in US Treasury yields and crude oil prices, although tight liquidity conditions limited the fall in short-term rates, dealers said.


Today, the one-year OIS rate settled at 5.83-5.87% as against 5.84-5.88% on Thursday, while the five-year swap closed at 5.93-5.97% versus 5.97-6.01% at previous close.


Yield on the 10-year US Treasury note dropped 8 basis points to settle at 2.31% on Thursday, while crude oil for July delivery on New York Mercantile Exchange declined over 5%, closing $3.51 lower at $57.91 per barrel. The crude oil contract for July delivery was at $58.59/bbl at the end of Indian market hours.


A decline in US Treasury yields generally leads to flow of overseas investment into relatively high-yielding emerging market assets such as Indian government bonds. Falling crude oil prices have a softening effect on India's inflation and ease pressure on government finances as the country is a major importer of the fuel.


Hopes of the Reserve Bank of India easing monetary policy and announcing steps to supply liquidity in the banking system also lent a downward bias to rates, dealers said. 


Given the mounting risks to economic growth, some market players expect the central bank to announce measures to support liquidity before the policy review, possibly as early as this week. The Reserve Bank of India will detail its next monetary policy statement on Jun 6.


After market hours today, the RBI said that it would purchase government bonds worth 150 bln rupees on Jun 13 in order to infuse durable liquidity in the banking system.


"Now that the event risk of the elections is out of the way, we can expect the RBI to send out a reassuring signal on liquidity," a dealer with a primary dealership said. "There is not too much of room for swaps to fall because at the current levels more than one rate cut has been factored in, but given that both the RBI and the government are focussed more on growth, there is a possibility that there is room for more rate cuts," he said.




The OIS market is shut on Saturdays.


On Monday, swap rates may open down as the RBI's decision to announce a bond purchase under open market operations in June has led market players to believe that the central bank will be proactive in supplying liquidity to the banking system.


Expectation of the RBI easing monetary policy is also likely to lend a downward bias to swap rates.


Any sharp movement in US Treasury yields and crude oil prices may also guide rates in early trade.


The one-year OIS rate is seen in a band of 5.80-5.88%, while the five-year swap is seen at 5.90-5.99%.


 At 1700 ISTThursday's close
1-year OIS5.83-5.87%5.84-5.88%
2-year OIS5.76-5.80%5.79-5.83%
5-year OIS5.93-5.97%5.97-6.01%
1-year MIFOR
2-year MIFOR6.41-6.56%6.45-6.60%
5-year MIFOR6.78-6.93%6.84-6.99%



US$1 = 69.5250 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT


Edited by Maheswaran Parameswaran


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