OIS rates fall significantly on expectations of deeper rate cuts by RBI

Overnight indexed swap (OIS) rates have gone down significantly in April so far despite the rise in US Treasury yields on expectations of a deeper rate cut by the Reserve Bank of India’s (RBI’s) monetary policy committee, said dealers.

 

The one-year OIS rates and five-year OIS rates fell by 27 basis points (bps) and 19 bps respectively in April so far.

 

“The liquidity condition started improving since the first day of the financial year, and then the RBI announced the open market operation (OMO) auctions, which led to expectations of a deeper rate cut, decoupling the OIS from the US Treasury,” said a treasury head of a private bank.

 

Market participants said that the fall in overnight rates further weighed on OIS rates.

 

“In a single day, the OIS is repricing 4-5 bps downwards after a significant fall in overnight rates,” said a dealer at a primary dealership.

 

The weighted average call rate was trading below the repo rate at 5.79 per cent on Friday.

 

The yield on the benchmark 10-year US Treasury bond has moved up by 10 basis points in April so far amid global trade war tensions.

 

On the domestic front, the rate-setting panel cut the repo rate by 25 basis points to 6 per cent on Wednesday. The panel also decided to change the monetary policy stance from “neutral” to “accommodative”.

 

RBI Governor Sanjay Malhotra said in the post-policy press conference that the central bank would ensure surplus liquidity and that an accommodative stance implies either a status quo or a rate cut, prompting traders to anticipate a deeper rate cut going ahead.

 

The RBI has infused ₹2.9 trillion via OMO auctions so far and ₹2 trillion via long term variable repo rate (VRR) auctions. Net liquidity in the banking system was in a surplus of ₹1.8 trillion on Thursday, according to latest RBI data.

 

Governor Malhotra, in his monetary policy statement, said, “The (monetary policy) stance should not be directly associated with liquidity conditions. While liquidity management is important for monetary policy, including decisions related to (the) policy rate, it is an operating tool with the RBI for various purposes including monetary policy transmission.”

 

“Monetary policy decisions to change policy rates do however have implications for liquidity management, being the operational tool to carry out policy changes. To summarise, our stance provides policy rate guidance, without any direct guidance on liquidity management,” the RBI governor added.