By Nimesh Vora and Jaspreet Kalra
MUMBAI (Reuters) -Foreign investors are piling into offshore dollar/rupee non-deliverable swaps (NDS) as that is a more attractive trade than overnight index swaps to bet on the Indian central bank lowering interest rates further, traders said.
The spread between the 1-year NDS and the rupee non-deliverable overnight index swaps (NDOIS) — the two instruments foreign investors have access to punt on Indian rates — widened to a two-year high last week.
That was accompanied by volumes more than doubling over the past two weeks and a notable pickup in enquiries for NDS, an analyst at a Singapore-based bank said.
The 1-year NDS is currently at 6.20%, 50 basis points higher than the same-tenor NDOIS. The spread, said Goldman Sachs, now gives better value in NDS for investors positioning for further rate cuts.
The Reserve Bank of India has lowered rates twice so far this year and economists expect that with inflation easing to an over-five-year-low in March, there is room for at least two more cuts in 2025.
“NDOIS is pricing in two additional rate cuts and we expect NDS rates to go down to that level,” Goldman said in a note.
A trader at a Mumbai-based bank concurred, noting that with NDOIS having little room for further dovish repricing, NDS offered a more compelling relative value play.
Mitul Kotecha, head of Asia FX and emerging markets macro strategy at Barclays, said investors prefer the NDOIS market to position for rate moves — a trend that may explain the more aggressive NDOIS pricing than NDS, according to local bankers.
RESURGENT RUPEE
While both NDS and NDOIS are sensitive to rate expectations, currency dynamics play a much bigger role in the NDS market.
A sizeable depreciation in the rupee, for instance, would push up hedging costs and, in turn, lift NDS rates — an effect that would be far more muted in the NDOIS market.
Since plummeting to an all-time low of near-88 per dollar in the middle of February, the rupee has enjoyed a good run, appreciating by over 3% as the greenback weakened due to worries about a U.S. tariff-led trade war.
This flip in the rupee’s fortunes means that Indian importer activity is likely to reduce, which in turn would help narrow the NDS-NDOIS spread, according to traders.
(Reporting by Nimesh Vora and Jaspreet Kalra; Editing by Savio D’Souza)
