MIFOR Swap rate at bottom?
The above graph is a line chart of Indias MIFOR Swap rates (3 year) from 19th Sep 2016 till date.
In the last month, MIFOR Swap rates have fallen off sharply, the uptick in the underlying USD LIBOR rates were outweighed by a falling rupee interest rate with RBI eventually cutting rates by 25 bps on Oct 5. The MIFOR Swap rate is determined by two points, namely the USD overnight Libor which is the floating leg and USD/ INR forex Swap point of the similar maturity being the fixed leg. The rates saw a sharp rise post the FED meeting on Sep 22 ( see graph above) when it became evident that the three FED members were in favor of an immediate rate hike and the view on the economy overall was hawkish which increased chances of a rate hike in December. Post that, the domestic rate cut saw rates getting eased off again, supported further by lower inflation numbers last week, which has kept the door ajar for another rate cut by RBI.
However, given rising bond yields and the propensity of the FED to keep talking up the dollar and a December rate hike, we believe these rates are close to the bottom of the curve at least over the next six months. Despite falling inflation, RBI will likely hold off on an immediate rate cut perhaps till February, when the impact of the minimum support prices on the Rabi crop as well as the pending government arrear payments will be more visible on the inflation numbers. There is an outside chance of course that the FED could hold off on a rate hike in December either on account of concerns in China or the election outcome in the US (Trump wins) but both these possibilities look to be an outside chance as off now.