Rajan's Cash Supply Bets Push India Rate Swaps to Two-Week Low

  • RBI may buy one trillion rupees of bonds: India Ratings
  • Ten-year yield to drop to 7.30 percent by year-end: survey

India’s one-year interest-rate swaps dropped to a more than two-week low on optimism the central bank will add more funds to tackle the liquidity deficit in the financial system.

The cost to lock in payments on borrowings for one year fell one basis point to 6.66 percent in Mumbai, the lowest level since April 11, data compiled by Bloomberg show.

“The swaps are reacting on expectations RBI will infuse more cash through open-market operations,” said Soumyajit Niyogi, associate director at India Ratings, a unit of Fitch Ratings in Mumbai. “Bond repurchases will largely depend on capital inflows. We estimate about a trillion rupees of buybacks in this fiscal year.”

The Reserve Bank of India resumed open-market operations in December after a gap of almost two years to tackle a cash crunch in the financial system. It has bought bonds worth 300 billion rupees ($4.5 billion) in April, helping mitigate the impact of government debt sales. The overnight call-money rate, a gauge of interbank funding availability, averaged 6.29 percent in the month, down from 6.69 percent for all of March, data compiled by Bloomberg show.

The cash infusion through OMO is to serve RBI’s purpose of improving monetary transmission to spread the benefits of its five interest-rate cuts since early 2015 more widely into the world’s fastest-growing economy. The assurance of adequate liquidity has also led investors in sovereign bonds to turn more bullish.

The yield on notes due January 2026 was little changed at 7.44 percent, prices from the RBI’s trading system show. The benchmark security capped a third monthly gain on Friday, with the yield dropping more than 30 basis points since Jan. 31 to 7.44 percent. It’s seen declining to 7.30 percent by Dec. 31 in the latest Bloomberg survey, down from 7.50 percent predicted in a March poll.

The rupee fell 0.2 percent to 66.4550 a dollar, according to prices from local banks compiled by Bloomberg.

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