India's one-year OIS spikes signalling April rate hike
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India's one-year overnight indexed swap (OIS) rate, often seen as the clearest indication of future policy rates, rose to the highest level in three months, signalling that another interest rate hike is likely in April, analysts said.
The jump in rates followed a higher-than-expected increase in retail inflation in January to 6.52%.
"If you had assigned a certain probability of rate hike, that probability has been doubled after the inflation data," said Akhil Mittal, senior fund manager at Tata Asset Management.
The one-year swap rate jumped to 6.93%, the highest since Nov. 10, jumping 27 basis points (bps) before last week's central bank monetary policy announcement. The five-year swap rate was at 6.48%, up 25 bps during the same period.
"The swap market is the quickest to react to interest rate adjustments, and after the inflation data, repo rate being raised to 6.75% has become a real possibility," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
Swaps have witnessed continuous paying pressure since the Reserve Bank of India (RBI) raised the repo rate to 6.50% on Feb. 8 and kept the door open for more hikes, while highlighting inflation concerns.
India's annual retail inflation in January rose above the RBI's 6% upper threshold for the first time since October on rising food prices and sticky core inflation.
Deutsche Bank also expects the central bank to hike rates at least one more time by 25 bps in April.
"At this stage, we are not forecasting further rate hikes beyond April, but clearly risks have risen for rates to be "higher for longer"," chief India economist Kaushik Das said.
The RBI has raised the repo rate by 250 bps since May through six consecutive rate hikes in its battle against inflation, which remained above the 6%-mark for 10 months in 2022 before easing in November-December.
Citi has revised its average headline inflation forecast upwards to 6.2% for the current quarter and 5.1% for the next financial year.
"Upside surprise in Jan CPI print and expectation of 6.4%-6.5% level for Feb. 23 has increased our conviction of 25 bps hike in April. We won't be surprised if the RBI continues its withdrawal of accommodation stance in April," said Samiran Chakraborty, Citi's chief India economist.
