India rate swaps down on lower bond yields

MUMBAI, Nov 25 - Indian rate swaps fell to new 2-1/2-month lows on Wednesday after a drop in bond yields prompted investors to cut their paid positions, traders said.

However, decline on the short-end of the swap curve was slighter on view that liquidity may tighten in the coming weeks.

At 4:30 p.m., the benchmark five-year swap <INRAMONMI5Y=> was trading at 6.43/47 percent, a level last seen on Sep. 9 and compared with Tuesday's close of 6.49/53 percent.

The one-year rate <INRAMONMI1Y=> was at 4.52/56 percent, from its previous close of 4.54/58 percent.

The spread between the two rates was at 191 basis points, down from 195 on Tuesday and around 203 earlier this month.

"I think year-end pressure is the reason why many participants showed receiving interest across tenures," Tarun Agarwal, a dealer at brokerage Prebon Yamane said.

"However, interest at the one-year was low as people are expecting some tightening measures in the January review."

The central bank slashed its key lending and borrowing rates by 425 basis points and 275 basis points respectively since late 2008 to shore up the economy that suffered from a global financial crisis.

The repo, or the rate at which the central bank lends to needy banks via the liquidity adjustment window, is currently at 4.75 percent and the reverse repo, or the rate at which banks park their excess funds to the RBI, is now at 3.25 percent.

Analysts and market participants now expect the central bank to shift the policy to a tightening stance as economic data, of late, have shown growth is picking up and inflation rising.

Most analysts do not forecast a hike in the key lending and borrowing rates at the January policy, but anticipate a hike in bank's cash reserve ratio, which may reduce the free cash in the system. [ID:nBMA006252]

Inefficiencies in Indian banks have meant the large cuts in official rates have not been fully passed on to customers, hampering the effectiveness of monetary policy, the head of the central bank said on Wednesday. [ID:nBOM353849]

Total volume in swaps was at 19.50 billion rupees at the central bank's reporting platform. ((boby.michael@thomsonreuters.com; Tel: +91-22-6636 7377; Reuters Messaging: boby.michael.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))