MUMBAI (Reuters) – Part of India’s overnight index swaps curve, a gauge of future policy rates, could sharpen as investors expect a tougher-than-expected stance from the central bank, Bank of America Securities said on Friday.
Bank of America expects the Reserve Bank of India to raise interest rates by 25-35 basis on September 30th and estimates that the policy rate will reach 6.5% by the end of 2023, much later than some investors expect.
The 6-month forward OIS curve is priced at a 60 basis point rate hike during the next two RBI meetings, which would bring the policy rate above 6.5% by December itself.
“Inflation and growth indicators (track) are below the RBI’s expectations, increasing the chances of disappointment in the upcoming meeting,” the research house said.
India’s central bank meets next week, with a slim majority of economists in a Reuters poll expecting a half-point increase, and others expecting a smaller 35-basis-point increase.
Bank of America noted that inflation has been developing in line with the Reserve Bank of India’s forecast so far this quarter. At the previous policy meeting, the Reserve Bank of India held its growth forecast for the current fiscal year.
Research House recommends entering a 3-month non-deliverable 1-year OIS deal, and 5-year steep trades.
In support of trade, Bank of America highlighted that the five-year portion of the OIS curve was below the price of financial risk.
“The five-year plan is to price fixed-rate policy after rapid rate increases, but the steeper curve will more fully reflect the term premium for financial risk,” she said.