India's 1-year Overnight Indexed Swap (OIS) rate touched a near 20-month high on Friday as cash levels did not improve as expected and worries over high inflation weighed. Bond yields, which were up since early trade due to concerns on the results of the 120-billion rupee ($2.6 billion) sale, inched up further after the benchmark 10-year bond cut-off came higher than expected.
The one-year swap rate ended at 5.74 percent, up six basis points on the day after rising to the day's high of 5.77 percent, its highest since November 18, 2008. The benchmark five-year swap rate ended at 6.81 percent, up four basis point. It touched a high of 6.85 percent intra-day, its highest since June 22. "There is a bias towards paying as liquidity did not improve as was expected earlier. Also, the June inflation data may be bad which is another worry," said R.V.S. Sridhar, president and head of markets in treasury at Axis Bank.
The yield on the benchmark 10-year bond ended at 7.65 percent after rising to the day's high of 7.66 percent after the auction result. It had ended at 7.60 percent on Thursday. Traders said banks' steady borrowing of around 500 billion rupees a day this week from the Reserve Bank of India (RBI) through its repo facility suggests that government spending had not gathered pace.
Dealers are expecting the government to step up spending which in turn would help improve the liquidity situation. Telecom companies paid about $21.4 billion to the government after the third-generation (3G) and broadband auctions, draining cash out of the financial system and sending overnight rates to a three-month high in end-June.
"The key thing to watch is RBI's stance on liquidity. Rate hike in a calibrated manner is almost a given," said Hitendra Dave, head of global markets at HSBC in Mumbai. "Swap rates will come down only if liquidity is visible to the market on a sustained, and not temporary, basis," Dave added.
India's food inflation eased, but fuel inflation accelerated in late June. A Reuters poll after the earlier-than-expected 25-basis point rate hike by the central bank last week showed analysts expect a 25-basis point hike during the quarterly policy review. Traders said money market sentiment also turned cautious after the South Korean and Malaysian central banks lifted their policy rates recently.
Dealers said they would watch industrial output data on Monday for further cues. It is forecast to grow 16 percent in May from a year earlier, lower than an annual growth of 17.6 percent in April. They said they would also watch the movements of US yields for direction.
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