Offshore Swap Spreads Widen on Indian Rupee Concerns
Offshore swap spreads have hit 100 basis points as the Iran war pressures the rupee. Analysts expect rate hikes to counter rising oil and inflation pressures.
The gap between offshore swaps used to wager on policy rates in India and those reflecting the cost of hedging against a weaker currency is widening, signaling significant anxiety over the rupee's outlook as the conflict in Iran threatens the net energy importer. The one-year non-deliverable overnight index swap (NDOIS), a primary gauge for interest rate expectations, has climbed 50 basis points since the Middle East conflict began. Meanwhile, the one-year dollar/rupee non-deliverable currency swap, which tracks hedging costs, has jumped more than 90 basis points, reflecting intense pressure from speculative flows.
This has pushed the spread between the two rates to over 100 basis points, up from 60 basis points before the war started on February 28. A rates trader at a hedge fund based in Singapore noted that while the current spread is very high, the fragmented nature of the market could cause it to expand further.
