IRS Review: Rates sharply up on rise in gilt yields, fiscal worries

Thursday, Oct 17, 2019


By Suyash Pande


MUMBAI- Overnight indexed swap rates rose sharply today because of a rise in domestic and US government bond yields and as speculation of the Centre announcing fresh fiscal stimulus to boost growth stoked worries of a rise in inflation, dealers said.


Today, the one-year OIS closed at 5.06-5.10%, against 5.02-5.06% on Wednesday, while the five-year swap settled at 5.10-5.14%, compared with 5.02-5.06% at the previous close.


The yield on the 10-year benchmark 6.45%, 2029 bond rose 3 basis points to settle at 6.50% today because of reports that the government is likely to miss the budgeted fiscal deficit target of 3.3% of GDP for the current financial year.


Reuters today reported, quoting officials, that the government could overshoot the fiscal deficit target by 30-50 bps as the sharp slowdown in India's GDP growth has led to a fall in the Centre's revenue collections. The report also said that the government is yet to decide if it wants to announce fresh fiscal measures to boost growth.


GDP growth fell to a 25-quarter low of 5.00% in Apr-Jun, data released late in August showed. The Centre has taken steps to revive growth, including a sharp cut in corporate tax rates in late September, a move that is estimated to cost the exchequer 1.45 trln rupees in revenues. If more fiscal stimulus were to be announced, not only would it worsen the government's finances, it could also stoke inflation, especially if the measures were aimed at boosting consumption, dealers said. 


Fiscally expansionary measures would also eat into the space for the Reserve Bank of India to loosen monetary policy, dealers said. So far in 2019, the central bank has lowered the repo rate by 135 basis points and, given the weakness in growth, dealers expect at least 25 bps more of rate cuts in the coming months.


The rise in OIS rates, particularly in the five-year segment, was aggravated because of a rise in US Treasury yields after news emerged that the UK and the European Union had reached a deal regarding Brexit. The yield on the 10-year US Treasury note was last at 1.77% as against 1.75% at the previous close. A rise in US bond yields typically reduces overseas investors' appetite for assets in riskier emerging markets such as India. 


"The trajectory of the swap rates was already on the higher side because of the news on fiscal deficit, then the US yields also rose after the Brexit deal news so the bias was throughout on the higher side," a dealer with a private bank said. "The news that fiscal deficit could be missed by 30-50 basis points confirmed fears that the market had about fiscal situation."



OIS rates may open steady on Friday as market participants may refrain from placing large bets ahead of the minutes of the RBI's Oct 1-4 monetary policy meeting, expected after market hours. The minutes of the meeting could help traders gauge the views of individual members on the course of interest rates. 


The RBI is widely expected to lower interest rates in the coming months because of a sharp slowdown in economic growth. However, traders are uncertain about the extent of room the central bank has to cut rates further, given that it has already cut the repo rate by 135 bps in 2019, the most in a calendar year since 2009.


Any sharp movement in US Treasury yields or crude oil prices may steer OIS rates in early trade.  


The one-year swap is seen at 5.04-5.12%, while the five-year OIS is seen at 5.08-5.16%.


 At 1700 ISTAt 1700 IST
1-year OIS5.06-5.10%5.02-5.06%
2-year OIS4.95-4.99%4.89-4.93%
5-year OIS5.10-5.14%5.02-5.06%
1-year MIFOR
2-year MIFOR6.07-6.22%6.05-6.20%
5-year MIFOR6.42-6.57%6.40-6.55%



US$1 = 71.16 rupees


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


Edited by Avishek Dutta


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