OIS rates spike in Oct on geopolitical tension, spread with G-sec narrows

OIS rates are a crucial indicator reflecting expectations for interest rate changes, and they are the principal tool for hedging interest rate risk in India

Overnight index swap (OIS) rates have been soaring in October due to the rise in US Treasury yields and on the expectations of delayed rate cut by the Reserve Bank of India’s rate setting panel, said dealers.

OIS rates are a crucial indicator reflecting expectations for interest rate changes, and it is the principal tool for hedging interest rate risk in India.

The spread between the 5-year OIS rate and the yield on the benchmark 10-year government bond has narrowed by 8 basis points in the same period.

The 5-year OIS rate has risen by 10 basis points, while the one-year OIS rate is up by 8 basis points during the current month. Meanwhile, the yield on the benchmark 10-year government bond rose by 2 basis points.

RBI’s Monetary Policy Committee (MPC), the domestic rate setting panel kept the key policy repo rate unchanged for the 10th straight occasion in October, though the stance was changed to neutral, from withdrawal of accommodation.

Some economists expect a reduction in the policy repo rate in the next meeting scheduled in December.

“The 5-year has been tracking the US yields, and the 1-year was looking at the domestic rate factor,” said Naveen Singh, vice-president of ICICI Securities’ primary dealership.

“People are not taking active calls on the spread, except on the shorter end, not on the 5-year OIS so much. There are different factors at play on the swap market and versus on the G-sec curve. The G-sec is still driven much more by demand supply and how options are panning out. But swaps is clearly tracking global events,” he added.

While, the higher than expected inflation print for the month of September led to further rise in 1-year OIS rate, the 5-year OIS rate moderated as off-shore traders received fixed rates, said market participants. They said that the 1-year OIS curve has been reflecting a 50 basis point rate cut by the domestic rate setting panel in the next 6 months.

“Currently, 5-year has receiving bias and 1-year has paying bias,” said a dealer at another primary dealership. “The 1-year OIS curve is reflecting a 50 basis points rate cut in the next six months,” she added.

The 1-year OIS rate settled at 6.47 per cent, and the 5-year OIS rate settled at 6.13 per cent on Wednesday.

The yield on the benchmark 10-year US Treasury bond rose by 34 basis points during the period due to the escalating geopolitical conflict in the West Asia, and a slew of unfavorable data in the US which indicated that the US Federal Reserve might opt for a moderate rate cut of 25 basis points in December, against the earlier expectation of a 50 basis point rate cut.