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Swap rates edge up as focus turns to budget

Swap rates edge up as focus turns to budget
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First Published: Fri, Jan 29 2010. 01 38 PM IST
Updated: Fri, Jan 29 2010. 01 38 PM IST
Mumbai: Indian one-year swap rates edged up on Friday after the central bank decided to absorb more cash from the banking system than expected, but the reaction was limited as it did little to clarify whether a policy rate hike was coming by April.
Bank shares recouped early losses while the rupee was little changed after the Reserve Bank of India lifted the cash reserve ratio -- the amount of funds banks must hold at the central bank -- by 75 basis points to 5.75%, slightly more than expected.
The RBI also raised its growth and inflation forecasts while calling on the government to roll back its borrowing, but its inflation-fighting tone did not convince market players that an increase in the reverse repo rate was a sure bet at its next quarterly policy review in April.
Overnight indexed swaps show the market is bracing for about 100 basis points of hikes in the reverse repo rate, now at 3.25%, over the next year.
Analysts said the RBI was playing a balancing act between trying to keep the economy’s robust growth on track while beginning to tighten loose monetary conditions, with an eye on rising inflationary pressures. “The central bank had prepared the market so well for a 50 basis points CRR hike that in order to make an impact, they had to do more than that. I think they will now wait to see how inflation and the budget pans out,” said Atsi Sheth, chief economist at Macro-Sutra.
The government will announce its borrowing needs for the fiscal year 2010-11 in its 26 February budget, which could determine the RBI’s next steps.
The one-year swap rate was at 4.92%, up 6 basis points on the day but falling back from a high of 4.97% struck immediately after the policy decision.
The benchmark 10-year bond yield was at 7.55%, flat on the day after jumping as high as 7.59%.
The partially convertible rupee was at Rs46.35 per dollar on the Reuters Dealing system, little changed from Rs46.40/41 before the decision and Thursday’s Rs46.35/36.
Dealers said the rupee is broadly tracking the domestic equity market.
The benchmark Sensex index was down 0.4%, outperforming broader Asia markets, after having slid as much as 1.7% after the policy news was released. Banks outperformed the main index, rising 1.8% by early afternoon on relief that policy rates were held steady, dealers said.
Inflation vs fiscal deficit
To help finance its stimulus without adding to an already large deficit, India has planned a series of stake sales in state-run firms and an auction of its 3G wireless spectrum.
Dealers said the government would be keen that adequate liquidity was left in the system.
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First Published: Fri, Jan 29 2010. 01 38 PM IST
More Topics: Markets | Swap rate | RBI | Credit policy | CRR |