India swap curve likely to flatten

India's overnight indexed swap curve is likely to flatten as an expected tightening campaign by the central bank takes hold, Standard Chartered Bank said in a recent note. The flattening is also anticipated because the gap between bond yields and policy rates are at historical highs, it said.

The Reserve Bank of India (RBI) is widely expected to raise the cash reserve ratio (CRR), the level of cash banks must keep with the central bank, when it finalises policy on January 29, and some market watchers expect it to raise policy rates too. Edward Lee Wee Kok, regional head of rates strategy at the bank, said both the bond and swap curves are very steep and unless inflation or the fiscal situation worsens significantly, yields could decline. He expects the 2-5 year swaps segment and the 2-10 year swaps segment to flatten. Kok said in a note on Monday the spread between the five-year swap rate and the reverse repo rate was at around 400 basis points compared with 200 basis points at the time of the last rate hiking cycle. "We expect the spread to narrow as the gradual rate-hiking cycle progresses and this will help to cap the upside in yields," he said. The risk to this forecast is the expected pace of monetary tightening and upsid e risks to the fiscal deficit, he said. India is in the last stages of completing a record borrowing plan of Rs 4 trillion or 6.8% of gross domestic product for 2009/10. It has an April to March fiscal year.

Source: http://www.moneycontrol.com/news/economy/india-swap-curve-likely-to-flatten-stanchart_436454.html