MONEY MARKETS-Indian swap curve inverts as cash tightens

* Tight cash seen putting a lid on more interest rate hikes

* Front end of OIS curve inverts for the 1st time in 2 yrs

* Receive one year OIS swaps around 6.72% – IndusInd Bank

By Saikat Chatterjee

HONG KONG, Nov 18 (BestGrowthStock) – One-month Indian overnight
indexed swap rates rose to a two year high on Thursday because
of a deepening cash squeeze in the local money market that
will probably last for the rest of the year.

Expectations for tight cash might also stay the central
bank’s hand in raising interest rates further, prompting some
banks to receive one-year swaps and causing the swap
curve to invert for the first time in nearly two years.

“The curve has inverted due to tight liquidity at the very
short end and also caused markets to think that we are close
to the end of hiking cycle which is causing some receiving on
the one year and beyond sector,’ said a rates trader at a
European Bank in Singapore.

A rupee cash crunch has worsened in recent weeks because
of a variety of factors, including IPO-related outflows and a
slowdown in federal spending leading to more banks tapping the
Reserve Bank of India’s overnight lending window for funds.

Aggregate bank borrowing has risen to an average of a
trillion rupees on Tuesday from around 700 billion at the
start of the month, pushing overnight rates well
above the RBI’s lending rate of 6.25 percent, an indicator of
the worsening cash crunch.

That jump in overnight rates has spilled into bills and
the OIS markets — especially below one year maturities — as
the floating leg of such swaps are derived from interbank rates.

Daily fixings have risen by 80 basis points (bps) since
October despite the RBI’s attempts to add cash to the system
by relaxing mandatory reserve requirements and introducing
additional cash injection operations. [ID:nSGE6A80EN].

Reflecting the tightening supply, one-month OIS rates have
since October risen by 70 bps to 6.81 percent — the highest
since November 2008 and swap traders expect rates to climb to
7 percent, absent more cash boosting measures.

Six-month bills yields (0#INBMK=: ) are trading near a
two-year high of 7.15 percent hit earlier this week, having
risen by more than 60 bps since October.

That jump in one-month OIS has so far outpaced the climb
in one-year rates which is up by only 8 bps to 6.72 percent in
the same period — pulling spreads between one year and one
month swaps to fall into negative territory for the first time
since January 2009.

“There is a growing belief the rate hike cycle may be
coming to an end with recent data points also turning weak and
so it appears to be clear skies until January at least,” said
a strategist at a European Bank in Mumbai.

September’s factory output significantly undershot market
forecasts thanks to an aggressive burst of rate hikes by the
RBI this year which has increased its lending and borrowing
rates by 150 and 200 bps respectively so far this year.

A broad wave of risk aversion that has swept across global
financial markets since last week has also raised bets of a
prolonged rate pause, traders said.

Some, such as J. Moses Harding who heads the global
markets group at IndusInd Bank in Mumbai, believes if cash
conditions deteriorate further, there is a “good chance” of
more reserve requirement cuts by the RBI and other cash
boosting steps.

He recommends receiving one-year swaps around 6.72 percent
levels targeting a downside of 6.65 percent.

(Editing by Kevin Plumberg)

MONEY MARKETS-Indian swap curve inverts as cash tightens