The Reserve Bank of India’s new monetary policy should have dispelled any lingering doubts about the future direction of interest rates: They will climb uphill.
The question is: by how much? One way to figure out an answer to this important question is to look at what the market for overnight indexed swaps, or OIS, is telling us. These swaps are derivatives that are bought by banks to protect their bond portfolios—and give us information on market expectations about future interest rates.
In recent days, the OIS market has been pricing in a 200 basis points increase in interest rates a year down the line. Such wisdom of the crowds should provide useful clues to bankers, traders and company CFOs.
Meanwhile, Reuters reported on Tuesday evening that growing inflation worries pushed up five-year OIS rates ,while the central bank’s move to leave rates unchanged for now pushed down one-year OIS rates.
So what OIS traders are telling us is that interest rates and inflation may be far higher in October 2010.