The Overnight Indexed Swaps (OIS), a gauge for rates in the future, is indicating increases of up to 2 percentage points in the benchmark repo rate in the next two years. A sharp increase in overall funding costs could dent growth. “Any monetary tightening has a price at the cost of growth, and that is nonlinear,” said Soumyajit Niyogi, director at India Ratings. “It will likely weigh on the country’s growth trajectory, especially when a fair share of loans is directly linked to external benchmarks, such as the repo. The transmission of future rate hikes will be faster than ever.”
The total share of loans linked to external benchmarks is estimated to be about 40% now from 28.5% during March 2021, and 2.4% in September 2019.
Participants Expect Rate Increase in Every Policy
Official rate changes instantly take effect for loans linked to external benchmarks. The one-year OIS yielded about 5% on Wednesday, the last trading day in a truncated week, compared with 4.52% on April 7, the day before the announcement of the bi-monthly monetary policy, showed Bloomberg data compiled by ETIG Database. According to swap curves, participants now expect a rate increase in every policy for the remainder of the fiscal, with the likelihood of even 50-bps increases at one go.
A basis point is 0.01 percentage point.
“Such aggressive rate hikes in such a short time period may have the potential to derail India’s economic growth,” said Dhawal Dalal, chief investment officer – fixed income, Edelweiss MF. “A gradual increase in the repo rate will probably be more ideal.”
The two-year derivatives gauge was at 5.81% on April 13 versus 5.17% on the day before the RBI policy announcement. At the review meeting, governor Shaktikanta Das brought the spotlight back on inflation management, citing higher prices of commodities, including those of motor fuels. The RBI also introduced the Standing Deposit Facility (SDF) at 3.75%, although it retained the reverse repo rate at 3.35%.
