MUMBAI: Rest of the world may be on a tightening monetary policy bias, but not the Reserve Bank of India, if one goes by what bond traders are indicating.
The Overnight Indexed Swaps (OIS) with one-year maturity, where a trader exchanges fixed rate payment for floating rates, has come off 40 basis points to 7.15% in the past few days signalling an RBI pause for the rest of the year and the first quarter of next. A basis point is 0.01 percentage point.
“After the MPC's surprise decision to leave rates unchanged in the October meeting, the market has toned down rate hike expectations,” said Ananth Narayan, associate professor (finance) at SP Jain Institute of Management and Research. “Continued soft food inflation and CPI prints, alongside lower crude oil prices have also helped in this adjustment down in swap prices.”
The Reserve Bank of India surprised the market by not raising the policy earlier this month belying majority market expectations. Before the RBI policy, the OIS metric factored in two consecutive rate increases of 50 basis points.
“Softening of one-year OIS curve as opposed to CP curve is a sign of easing pressure on non-credit premium components,” said Soumyajit Niyogi, Associate Director, India Ratings and Research. “The sharp drop is mostly due to RBI's signalling effect – first ensured liquidity management through one month OMO calendar, secondly alleviating fear of using policy rate as a tool against weak currency and subsequently giving signal of higher tolerance for currency as an adjusting factor.”
The yield on benchmark government bonds has fallen more than 30 basis points over a month amid rising trade volumes. The gauge ended at 7.89 per cent Tuesday, down from September peak of 8.23 percent. Bond yields and prices move in opposite directions.
“Given the worries around corporate and NBFI debt rollovers, the expectations are that RBI will continue to provide money market liquidity through repos, OMOs and regulatory forbearance,” said Narayan.
The central bank declared it would buy Rs 36,000 crore in aggregate in October. The Reserve Bank of India has kept the market well-oiled with July-October bond purchases at Rs 76,000 crore in total.
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