Indian Rate Swaps Near Lowest Since 2010 as RBI Seen Adding Cash

  • Central bank may buy more bonds to boost liquidity: Edelweiss
  • Benchmark rate seen unchanged on Tuesday, survey shows

India’s one-year interest rate swaps held near a five-year low on speculation the central bank will take steps to tackle a cash crunch.

The cost of locking in interest rates for a year, a derivative used to guard against swings in funding costs, earlier dropped to 6.86 percent, the lowest since December 2010, before rising three basis points to 6.89 percent, according to data compiled by Bloomberg. The contracts have fallen 18 basis points this year. The overnight call-money rate, a gauge of interbank funding availability, surged 75 basis points to 6.50 percent.

Capital outflows, slower government spending and central bank intervention in the foreign-exchange market have drained funds from the banking system, according to Edelweiss Financial Services Ltd. The Reserve Bank of India won’t cut its policy rate or reduce lenders’ reserve ratios at a review on Tuesday, according to most economists surveyed by Bloomberg, although analysts expect the central bank to buy more government bonds this quarter.

“Swaps are reflecting expectations the RBI will take measures to address the shortage of funds,” said Ajay Manglunia, the Mumbai-based head of fixed income at Edelweiss. The central bank could cut reserve ratios or buy more sovereign notes to boost liquidity, he said.

Open-Market Operations

The central bank Monday injected 150 billion rupees ($2.2 billion) through an overnight repo auction. The RBI added a total of 200 billion rupees via open-market operations on Dec. 8 and Jan. 21. The RBI will purchase an additional $4 billion of rupee-denominated securities this quarter, according to the median estimate of seven analysts surveyed by Bloomberg. Bank of America Merrill Lynch expects as much as $12 billion to be injected in the fiscal year ending March.

Thirty-eight of forty economists in a Bloomberg survey predict the RBI will leave its benchmark repurchase rate at 6.75 percent on Tuesday and two see a cut to 6.5 percent. Twenty-seven of 28 forecast the cash-reserve ratio will be held at 4 percent on Tuesday, while one sees a reduction to 3.5 percent.

The rupee fell 0.1 percent to 67.84 a dollar, prices from local banks compiled by Bloomberg show. The yield on the sovereign notes due May 2025 rose one basis point to 7.79 percent in Mumbai, according to prices from the central bank’s trading system.

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