Swap rate at 27-month low as crude oil eases

Anticipated fall in global commodity prices, slowing inflation will give RBI room to cut borrowing costs

India's one-year interest-rate swaps fell to a 27-month low on speculation that a drop in commodity prices and slowing inflation will give the central bank room to cut borrowing costs.

Brent crude has slipped 9.8 per cent this month to $100.23 a barrel, which may help cut costs for a nation that imports about 80 per cent of its oil requirement. Wholesale prices rose 5.96 per cent in March, the slowest pace since November 2009, official data showed this week.

That was below the central bank's 6.8 per cent projection for the month.

"The outlook for prices to ease further has increased with the fall in global commodity prices," said Arvind Chari, a senior fund manager at Quantum Asset Management Co. "This should provide scope for the central bank to cut rates, and swaps are reflecting that expectation."

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.30 per cent as of 10:30 am in Mumbai, data compiled by Bloomberg show. That's the lowest level since January 2011.

The plunge in gold in 2013 could lower import costs by almost $7 billion in the 12 months ending March 2014, according to a research note from Barclays. Gold purchases account for more than two-thirds of India's current-account deficit, according to the Reserve Bank of India.

The monetary authority last reduced the benchmark repurchase rate by 25 basis points to 7.5 per cent on March 19. The next policy review is due on May 3. The yield on the 8.15 per cent government bonds maturing in June 2022 was little changed at 7.83 per cent, according to the central bank's trading system.