MONEY MARKETS-Indian swaps tumble after S&P dollar costs higher

Fri Mar 19, 2010 4:43am EDT

* Indian swaps fall on SP move, RBI rate inaction view

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* Dollar costs rise as LIBOR moves higher

By Umesh Desai

HONG KONG, March 19 (Reuters) - Indian swaps fell on Fridayafter Standard Poor"s raised the country"s rating outlook tostable and as traders reversed positions on expectations thecentral bank is unlikely to raise rates before its April policymeeting.

The five-year overnight indexed swap rate INRAMONMI5Y=fell 5 basis points to 6.83 percent after SP"s late Thursdayaction, which it said was based on India"s improving fiscalposition and strong economic growth.

Confidence that the Reserve Bank of India (RBI) will notraise interest rates before April also prompted some traders tosquare paid positions.

Financial markets have priced in a 25 to 50 basis pointinterest rate hike at the April 20 meeting though it isexpected the central bank will drain cash from the systembefore taking any rate action.

Kaushik Basu, chief economic adviser in the financeministry, said late on Thursday he does not expect any policyaction even though RBI deputy governor said earlier in the daythe central bank was open to taking action ahead of its Aprilreview.

"The daily cost of holding on to paid positions is quitesteep. There has been some cutting of paid positions," saidVineet Malik, head of interest rates at HSBC India, Mumbai.

"There is a lot of time before hikes kick in from now toApril 20, which means giving away 15-20 bps of carry if you paytoday," he said.

Elsewhere in the region rates were broadly higher with themarkets" feathers being ruffled by talk overnight of anotherFederal Reserve discount rate hike.

Australian OIS rates AUDOIS rose 1-5 bps across mostmaturities and New Zealand rates NZDOIS were 1-2 bps firm.

A month ago, the Fed surprised the markets when it raisedits discount rate -- the rate it charges on short-term loans tobanks -- while emphasizing it was not ready to begin the broadtightening of credit that would put the still nascent economicrecovery at risk.

The cost of borrowing dollars continued to climb, pullingfurther away from historic lows.

Singapore interbank 3-month dollar rates SGDDFIX=ABSGinched up to 0.42796 percent from 0.42172 percent. They hit arecord low of 0.41033 last week.

This follows higher fixings in the London interbank offeredrates with the three-month dollar LIBOR USD3MFSR= fixedupwards for a sixth straight session at 27.1 basis points --the highest since Nov. 16. (Reporting by Umesh Desai; Editing by Kim Coghill)

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