The one-year Overnight Indexed Swap (OIS) has surged to 6.62%, the highest in 45 months. The one-year OIS yielded at 6.62% versus 6.64% on December 18, 2018, showed Bloomberg data compiled by ETIG.
That has prompted dealers to believe the rate peaking cycle will take longer. The benchmark repo rate, now pegged at 5.40%, was earlier expected to peak in the range of 6-6.25%.
“It is certainly indicating a higher terminal rate,” Ashhish Vaidya, managing director at DBS Bank. “Pass-through effect is expected to make inflation sticky. That’s why globally central banks including the RBI are front-loading rate hikes.”
To be sure, rate derivatives point to a trend but it is not a highly liquid market in India.
Retail inflation as measured by the consumer price index last week sprang an ugly surprise with the August gauge bouncing back to 7% versus 6.71% a month earlier. The Reserve Bank of India projected inflation at 6.7% with July-September quarter at 7.1%. In April, inflation peaked at 7.8%.
“As long as expectations of the peak US Fed funds rate keep shifting higher, there could be a similar reset on expectations on the peak repo rate,” said Rajeev Radhakrishnan, chief investment officer – debt at Asset Management Company. “All market indicators are pointing at additional policy rate hikes in India.”
The US Fed will make another policy decision this Wednesday where it is now expected to raise the fund rates by 100 basis points instead of 75 basis points, anticipated earlier. US inflation print for August was at 8.3%, higher than average market expectation. It sent US Treasury benchmark yields to 3.46% up from 1.36% a year ago.
“Rate hike expectations have naturally soared,” said Sandeep Yadav, CIO – debt at DSP Mutual Fund. “The debt market is now factoring a higher level of terminal rate after central banks globally pointing to sharper rate rises.”
Hot price rises have already sent market rates spiking. Treasury Bills, shorter duration sovereign securities, yielded 9-11 basis points higher in the primary auction last Wednesday. The 10-year benchmark yielded about 15 basis points.
“Companies will have to fork out higher cost of funds if the terminal rate goes further up,” said Ajay Manglunia, managing director at
. “It is already reflecting in the market rates after August inflation print.”
The Monetary Policy Committee may go for a sharper rate hike, say 50 basis points on September 30 bi-monthly policy announcement.
