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Rates: taxes in sight, market increases risk premiums as RUB sells off

Today, the corporate sector is to pay monthly VAT, the first one in this tax period, which is estimated at RUB 90-100bn. With the arrival of the tax payment period, we expect money market rates to be under pressure. However, with the auction repo indebtedness at only RUB 2.3tn, there is enough collateral capacity to go through the tax payments without extensive use of the FX swap facility in our view and it is unlikely to exceed RUB 50-75bn due to fragmented collateral in the system. At the same time, as RUB is under significant pressure, NDF and XCCY implied rates increased 10-15bp and term risk premiums on the curve widened. The 3-month NDF is at 7.0% and 2-year XCCY is at 7.22%. The same price action was seen in the IRS curve, which widened to 7.7%. Overall, the dynamics were driven by the coverage of receivers’ positions and the reduction of wrong way risk, but the increase in risk premiums is related to expectations of a possible policy rate hike action in the near future, as weak RUB might filter through into consumer prices soon. Our base case scenario suggests that, due to a deceleration in consumer demand, CPI will remain close to the CBR target even if RUB’s pass through is accounted. Thus, policy rates are to remain on hold in the coming months, in our view.
Maxim Korovin, Anton Nikitin
VTB Capital analyst


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