Indian Swaps Climb to a Five-Year High After RBI Cash Tightening

India’s interest-rate swaps climbed to a five-year high after the central bank tightened cash supply to arrest a slide in the rupee.

The Reserve Bank of India capped the amount lenders can borrow in daily repurchase auctions at 0.5 percent of deposits, according to a statement on July 23. It raised the daily balance requirement for lenders’ cash-reserve ratios to 99 percent from 70 percent from July 27. Three-month interbank rates surged 100 basis points this month to 9.52 percent, according to prices from the National Stock Exchange of India Ltd. The rupee lost 7.8 percent since March 31 in Asia’s worst performance.

“While the central bank’s steps are short-term in nature, I don’t really see the RBI rolling them back on a whim until there is evidence to show things are changing,” said Killol Pandya, senior fund manager at LIC Nomura Mutual Fund Asset Management Co. in Mumbai. “There’s going to be pain for the bond markets.”

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose six basis points, or 0.06 percentage point, to 9.56 percent at 10:30 a.m. in Mumbai, data compiled by Bloomberg show. The rate, which surged 207 basis points in July, touched 9.61 percent earlier, the highest level since August 2008.

This week’s tightening measures were taken after the RBI raised two of its interest rates on July 15, while keeping the main repurchase rate unchanged at 7.25 percent, and moved to drain money through bond sales. A weaker currency makes imports costlier and threatens to spur gains in consumer prices, which have stayed close to 10 percent for more than a year. The rupee rose beyond 59 per dollar today for the first time in more than a month after the central bank’s steps.

The yield on the 7.16 percent bonds due May 2023 declined 13 basis points, or 0.13 percentage point, to 8.30 percent, according to prices from the central bank’s trading system. That pared this month’s increase in the rate to 85 basis points.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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