Thursday, October 19, 2017 New York : London: India: Tokyo:

 

DOMESTIC INTEREST RATE OUTLOOK

 

11-8-11

The downgrading of the US rating and the ever-expanding debt problems in the eurozone had pronounced a slowing growth in the developed economies and continuation of low interest rate regime and accommodative policy stance from Europe, US and Japan.

The short-term US interest rates are expected to be stable to lower atleast till the middle of 2013 as per the statement from the Fed. The USD swap rates have fallen across the tenor with the 5-year USD swap rate quoting at a low of 1.25%, possibly targeting 1% per annum.

 

As a result of the global economic crisis the commodity and crude oil prices have dropped. This is a good news for India as the imported inflation should be much lower atleast in the short-term.

The food and fuel inflation locally has shown clear signs of easing with an uptick in primary articles inflation to some extent. The headline inflation is expected to progressively ease lower to the RBI’s target level of 6 to 7% before end of March 2012.

The recent global developments have clearly signaled that our monetary Authorities may not hike the key rates any further and would prefer to hold a stable rate policy in the short-term. Going forward, there is a definite chance for them to change the stance to accommodative  inline with  expected the fall  in inflation at a later date to maintain the growth impulse in economy.

The local debt and money markets have taken cognizance of the above factors and the yields significantly dipped in the last 10 days. While the overnight call money rates are ruling at 8%,the short-term money market rates fell across the tenor. The long-term bond and swap yields have shown significant drop with the 10-year sovereign bond yield currently trading at 8.20% from a high of 8.46%  a fortnight ago.

The OIS rates have quite surprisingly recorded a significant fall across the tenor. The 1-year OIS rate fell to 7.60% and the 5-year rate to 6.90%. The negative swap spread between 1-year and 5-year is currently trading at above 70 basis points. The deep inversion in the OIS curve at the long-end is providing ample clues that the short-term rates are nearing its peak.

While the money market and swap yields can react much faster in relation to the developments, the lending and borrowing rates of Banks will be adjusted only after the Central Bank signals a change in their policy stance. Till such time the clients may have to incur higher cost on short-term borrowings.

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