1. 1-year OIS rate falls to five-year low of 6.98%

1-year OIS rate falls to five-year low of 6.98%

The one year overnight indexed swap (OIS) rate fell to a five-year low of 6.98% on Thursday. Bloomberg data shows that the last time the one-year OIS fell below this level was in December 2010. OIS are derivative instruments used to hedge against interest rate movements.

By: | Updated: January 8, 2016 2:13 AM

The one year overnight indexed swap (OIS) rate fell to a five-year low of 6.98% on Thursday. Bloomberg data shows that the last time the one-year OIS fell below this level was in December 2010. OIS are derivative instruments used to hedge against interest rate movements.

Brijen Puri, managing director and head of markets at JP Morgan India says the fall in the OIS rate is an indication that there is some sort of an expectation in the market of a possible cut in interest rates over the next few months. “The current market conditions might have added to those expectations,” he said.

ois

In OIS, while one party to the transaction pays a fixed rate of interest, the counter-party pays a floating rate of interest which is based on the FBIL Overnight MIBOR rate. The parties decide to pay the fixed or the floating rate depending on their perception of future interest rates.

A party which believes interest rates are going to come down decides to pay a floating rate of interest while opting to receive a fixed rate of interest. In contrast to this, a party which believes interest rates are set to rise decides to pay the fixed rate of interest.

The transaction is based on a notional principal amount. Of all the different OIS, the one-year and the five-year instruments are the most traded in India. On Thursday, the five-year OIS stood at 6.85%.

One foreign banker, who did not want to be quoted, pointed out that over the past few days the offshore non-deliverable OIS (ND-OIS) has been trending nearly 7-8 basis points below the onshore OIS. This is indicative of a belief prevalent in offshore markets that further rate cuts cannot be ruled out.

“Although both the markets operate independently, a fall in the offshore swap rate tends to have some effect on the onshore rate as well,” the banker stated. As on Thursday, the one-year ND-OIS was trading at 6.87% levels —11 basis points below the onshore rate.

In the December monetary policy, the Reserve Bank of India (RBI) had kept the repo rate unchanged at 6.75%.

“The scope for further lowering of repo rate appears limited, but certainly not out of possibilities,” says Soumyajit Niyogi, interest rate strategist at SBI-DFHI.

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