With expectations of a rate cut gaining momentum post the government sticking to the 3.5% fiscal deficit target for FY2017, the one-year overnight indexed swap (OIS) rates have hit the lowest levels in more than five years.
Bloomberg data shows that the one-year OIS hit 6.83% on Tuesday which is the lowest level since December 2010.
Since the government decided to adhere to the projected fiscal deficit target of 3.5%, the market seems be considering the possibility of another repo rate cut
“It is yet to be seen but the Reserve Bank of India (RBI) is likely to cut the rates by another 25 basis points even before the policy,” a foreign banker said on condition of anonymity.
Soumyajit Niyogi, associate director at India Ratings and Research says that the Union budget has cleared the cloud over rate and credibility uncertainties, corroborating sharp fall in OIS curves.
“After abrupt end of easing cycle in 2013, one-year curve has now come to 5-year low in the month of March; credit should also given to RBI’s commendable liquidity management,” Niyogi added.
Market expectations of a rate cut were also supported by the fact that the RBI earlier said it will closely watch the Union Budget for the government’s fiscal deficit target.
“Structural reforms in the forthcoming Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth, while also ensuring that inflation remains on the projected path of 5 per cent by the end of 2016-17,” the central bank stated in its February monetary policy review. This gathering up of rate cut expectations had led to the fall in the OIS rates on Monday.