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Bloomberg
Bets that India’s yet-to-be-named new central banker will lean toward looser monetary policy have accelerated a drop in interest-rate swaps triggered by improving cash supply in the financial system.
The cost to lock in rates for a year fell to 6.43 percent in Mumbai on Wednesday, the lowest level since September 2010, and has dropped six basis points this week, data compiled. That’s the most since the five days ended June 24. Benchmark 10-year yields have fallen to three-year lows this month as a pick-up in monsoon rains improved the inflation outlook for Asia’s third-largest economy.
A successor to Reserve Bank of India Governor Raghuram Rajan may be announced soon, the CNBC television channel said Tuesday, following a report by Bloomberg TV India that Arvind Panagariya, vice chairman of a policy research group established by Prime Minister Narendra Modi, was the top contender for the job. Rajan, whose term ends Sept 4, was accused by a member of Modi’s ruling party of keeping borrowing costs too high.
One-year swaps are falling for a second month as the RBI uses open-market debt purchases and other liquidity tools to boost availability of funds. A benchmark interbank rate has dropped to a six-year low as the monetary authority injected 800.1 billion
rupees (US$12 billion) by buying bonds since April.
“Expectations of monetary easing and better banking-system liquidity are the two factors behind the decline in swaps,†said Vivek Rajpal, an interest-rate strategist at Nomura Holdings Inc in Singapore. Rate-cut expectations are stemming from anticipation that the new governor will be more dovish than Rajan and the global growth concerns resulting from the UK’s vote to exit the
European Union, he said.
Other names doing the rounds for the post include Urjit Patel, one of Rajan’s deputies at the RBI who has helped establish an inflation target, and Arvind Subramanian, Modi’s top economic adviser.
The new governor faces the challenge of keeping inflation under check, given the central bank’s target to limit price gains to 5 percent by March 2017, while maintaining currency stability as emerging markets deal with the implications of Brexit and a
potential increase in US interest rates.
Nomura expects the RBI to lower the benchmark repurchase rate by 25 basis points to 6.25 percent between October and
December, Rajpal said.