India short-term OIS rates jump, eye mid-policy hike

India short-term OIS rates jump, eye mid-policy hike

Mumbai: India’s short-end OIS rates jumped on Tuesday as tight liquidity and rate worries forced investors to increase their interest rate hedges.

Worries over a mid-policy hike increased after finance minister Pranab Mukherjee and K.C. Chakrabarty, a central bank deputy governor on Tuesday highlighted inflation worries and hinted at steps to control the price rise.

By 4:25p.m., the one-year swap rate rallied to 5.51%, a 19-month high as per Thomson Reuters data, and sharply up from Monday’s close of 5.29%.

The one-month rate also jumped more than 20 basis points to 5.41%.

“The OIS curve is pricing in a mid-policy rate hike in line with the statements coming from various sources and also the expected (cash) outflows," said Ashish Vaidya, head of fixed income trading at UBS India.

India’s headline inflation unexpectedly accelerated in May, government data showed on Monday. That and Friday’s higher-than-expected industrial output number together heightened expectations the RBI would raise rates before its July 27 review.

An expected outflow of over 1.36 trillion rupees ($29 billion) between late May and late June towards 3G spectrum payments, advance taxes and broadband auction payments has tightened liquidity with banks and sent cash rates higher.

The benchmark five-year rate was at 6.90%, from its previous close of 6.82%. The rise was smaller at the longer-end as the rate was tracking bond yields and global markets, traders said.

The yield on the 10-year benchmark bond was at 7.67%, below Monday’s close of 7.69%.

“The risk aversion trend has started helping global debt markets again, which is pushing bond yields lower and preventing sharp rise in far-end swaps," said a senior interest rate trader at a foreign bank.

A recovery in stocks and the euro fizzled out on Tuesday after Moody’s downgraded Greece to junk status, reigniting anxiety about Europe’s debt crisis and causing a slight retreat from riskier assets.

Some traders, however, said the central bank may not hike rates immediately as the cash conditions are tight and overnight lending in the inter-bank market has been happening near RBI’s key lending rate for the last two weeks.

“Yes, the sharp rise in short-end OIS is because of rate hike expectations building up in the market. But I would term it as a traders’ call rather than any thing backed by fundamentals," said Partha Bhattacharya, group treasurer, Essar Group.

“I will be surprised if the RBI hikes rates before liquidity becomes comfortable."