A surge in Indian overnight
indexed swap (OIS) rates — typically a key barometer of policy
rate expectations in normal times — is overstating the likely
impact of the Iran war and higher oil prices on domestic
monetary policy, traders and economists said.
India’s one-year and two-year OIS rates jumped more than 45
basis points each since the Israeli-U.S. war with Iran broke out
on February 28, while the benchmark 10-year bond yield
has risen by a more modest 11 basis points
through Monday, before paring some of the increase.
At current levels, swap rates are pricing in close to two
rate hikes by the Reserve Bank of India over the next 12 months.
Economists and traders, however, say that assessment looks
exaggerated given still-benign inflation conditions.
“We do not see a possibility of a near-term rate hike in
India as we do not expect retail fuel prices to move higher
immediately,” said Suvodeep Rakshit, economist at Mumbai-based
Kotak Institutional Equities.
“Oil marketing companies or the government are likely to
keep fuel prices unchanged, and the central bank will take that
into account.”
India has invoked emergency measures to divert gas supplies
to households and for transport fuel, limiting access for
industry as the war in the Middle East keeps energy prices
elevated with persistent concerns about supply.
With inflation currently below the central bank’s 4% target,
a rate hike does not appear to be on the horizon, a source
familiar with the RBI’s thinking said, declining to be
identified as the person is not authorised to speak to media.
Signals from the swap market should therefore not be read as
an outlook on monetary policy, the person added.
An email sent to the central bank remained unanswered.
Traders said part of the sharp move in swap rates reflects
investors exiting previously built speculative positions rather
than initiating fresh bets on policy tightening, adding noise to
the signal that is typically derived from swap markets.
Anticipating ample liquidity and benign inflation, overseas
investors had built sizable “received” positions in one- and
two-year OIS, a senior rates trader at a euro-area headquartered
bank said.
As oil prices surged and emerging market rates rose
globally, those trades were quickly unwound as a risk-management
measure, the trader added.
The resulting paying flows pushed swap rates sharply higher.
The rush to exit positions was also reflected in a pickup in
trading activity, with daily average OIS volumes rising around
30% in the first week of March compared to the daily average
activity in February.
Abhishek Upadhyay, senior economist at ICICI Securities
Primary Dealership, said the selloff in bonds has been cushioned
by strong RBI support, even as swaps reacted more sharply to
adverse newsflow.
The central bank is buying bonds worth 1 trillion rupees
($10.89 billion) this week and has been an active buyer in the
secondary market in recent days, helping cap the rise in yields.
($1 = 91.8580 Indian rupees)