Mumbai: Overnight Indexed Swap (OIS), a derivative gauge for future interest rates, has dropped 15-26 basis points over the past one week, reflecting changes in investor sentiment ahead of the Union Budget.
A combination of local and global factors is prompting investors to cut short positions on interest rates. While concerns on fiscal deficit numbers have softened partly, global interest rates have decreased. “Over the past one week, the fear of fiscal slippage is allaying even as some traders expected inflation topping out,” South Indian Bank deputy general manager (treasury) Ritesh Bhusari said. The fall in OIS suggests the return of interest cut expectations, “provided no ugly surprise in the Union Budget”, he added.
“The Union Budget could trigger further moves in those indices early next week,” Bhusari said. The OIS with one-year maturity, the derivative gauge where investors exchange fixed rates for floating, dipped 15 basis points since January 15 to 5.41 per cent on Thursday. A basis point is one-hundredth of a percentage point.
“The recent flattening in the OIS curve reflects the latest bond bullish turn to the global environment as well as the probability that the Budget deficit numbers may not be as adverse as initially feared,” said Suyash Choudhary, the head of fixed income at IDFC MF.
The matrix with a five-year maturity plunged 26 basis points during the same period, show data from Bloomberg.
“Unwinding of previous market positions may have amplified the quantum of fall at the five-year point,” Choudhary said. The benchmark bond yield fell six basis points during the seven trading sessions. But, the US Treasury yields have come off sharply by about 20 basis points.
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The Reserve Bank of India conducted the so-called “Operation Twist” to buy long-term bonds while selling shorter duration papers. This in turn aided bringing down elevated yields in line with policy rate reductions. Fiscal deficit was pegged by the government at 3.3 per cent of GDP for FY2019-20, but traders were expecting it to breach this target by a wide margin. A wide breach would lead the government to borrow more from the capital market to bridge the difference between its revenue and expenses. Traders were expecting a fiscal deficit at 3.5 per cent, which would translate into gross borrowings of about Rs 7.7-7.9 lakh crore. Higher borrowings will increase supply of sovereign papers.
Some hawks even predicted gross borrowings as much as Rs 8 lakh crore.
Source: Economic Times
