Rate-Cut Bets Accelerate Drop in India Swaps to Six-Year Low

Bets that India’s yet-to-be-named new central banker will lean toward looser monetary policy have accelerated a drop in interest-rate swaps triggered by improving cash supply in the financial system.

The cost to lock in rates for a year fell to 6.43 percent in Mumbai on Wednesday, the lowest level since September 2010, and has dropped six basis points this week, data compiled by Bloomberg show. That’s the most since the five days ended June 24. Benchmark 10-year yields have fallen to three-year lows this month as a pick-up in monsoon rains improved the inflation outlook for Asia’s third-largest economy.

A successor to Reserve Bank of India Governor Raghuram Rajan may be announced soon, the CNBC television channel said Tuesday, following a report by Bloomberg TV India Monday that Arvind Panagariya, vice chairman of a policy research group established by Prime Minister Narendra Modi, was the top contender for the job. Rajan, whose term ends Sept. 4, was accused by a member of Modi’s ruling party of keeping borrowing costs too high.

One-year swaps are falling for a second month as the RBI uses open-market debt purchases and other liquidity tools to boost availability of funds. A benchmark interbank rate has dropped to a six-year low as the monetary authority injected 800.1 billion rupees ($12 billion) by buying bonds since April.

To read more about the impact of RBI’s cash infusions, click here.

“Expectations of monetary easing and better banking-system liquidity are the two factors behind the decline in swaps,” said Vivek Rajpal, an interest-rate strategist at Nomura Holdings Inc. in Singapore. Rate-cut expectations are stemming from anticipation that the new governor will be more dovish than Rajan and the global growth concerns resulting from the U.K.’s vote to exit the European Union, he said.

Malaysia on Wednesday cut interest rates unexpectedly. Indonesia, Thailand and the Philippines have all reduced borrowing costs amid an uncertain global economic outlook. Rajan last lowered India’s benchmark repurchase rate in April, paring to a five-year low of 6.50 percent. Nomura expects it to be decreased by 25 basis points between October and December, Rajpal said.

Other names doing the rounds for the RBI chief’s post include Urjit Patel, one of Rajan’s deputies at the RBI who has helped establish an inflation target, and Arvind Subramanian, Modi’s top economic adviser. The new governor faces the challenge of keeping inflation under check, given the central bank’s target to limit price gains to 5 percent by March 2017, while maintaining currency stability as emerging markets deal with the implications of Brexit and a potential increase in U.S. interest rates.

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