The rate signal is muddied by the surge in India swap rates amid global turmoil
The surge in Indian overnight index swap (OIS), which is normally a key indicator of policy rate expectations, overstates the impact that 'the Iran War and higher oil costs will have on domestic monetary policies.
India's OIS rates for one-year and two-year periods have risen by more than 45 basis point each since the outbreak of the?Israeli U.S. war with Iran on February 28. The benchmark 10-year bond yield, however, has only risen by 11 basis points up until Monday before reducing some of the rise.
Swap rates currently reflect two rate increases by Reserve Bank of India in the next 12 months.
Economists, traders and others, however, believe that this assessment is exaggerated, given the still benign inflation conditions.
Suvodeep Rakshit is an economist with Mumbai-based Kotak Institutional Equities. He said: "We don't see the possibility of a rate hike near-term in India, as we don't expect retail fuel prices to move up immediately."
The central bank will consider this when determining fuel prices.
India has taken emergency measures to limit access to industry and to gas supplies for households. The Middle East war is keeping energy prices high, while there are persistent concerns over supply.
A source familiar with RBI's thinking, who declined to be named as the person was not authorized to speak to the media, said that a rate hike does not seem to be imminent, given the fact that inflation is currently below the central bank's target of 4%.
The person said that signals from the swap markets should not be interpreted as an outlook for monetary policy.
Unanswered emails sent to the Central Bank.
The traders said that part of the sudden increase in swap rates is due to investors exiting speculative positions they had previously built, rather than placing new bets for policy tightening. This adds noise to the typical signal derived from the swap markets.
A senior rates trader from a bank with a Euro-area headquarters said that overseas investors built large "received?"?positions on one- and two year OIS in anticipation of ample liquidity and benign price inflation.
The trader said that as oil prices?spurted and rates for emerging markets rose, these trades were unwound quickly to manage risk.
The swap rates rose sharply as a result of the resulting payments flows.
The rush to get out of positions was also reflected by a rise in trading activity. Daily average OIS volume rose?around 30 percent in the first weeks of March, compared with the daily average activity for February.
Abhishek UPadhyay is ICICI Securities Primary Dealership's senior economist. He said that the RBI has provided strong support to offset the bond sell-off, while swaps have reacted sharply when adverse news was released.
The central bank has been active in the secondary market, buying bonds worth 1089 billion rupees this week. This is helping to limit the increase in yields. $1 = 91.8580 Indian Rupees
(source: Reuters)
