Three charts show dawn of rate hawks in India as RBI policy turns

As the RBI steps up its rhetoric on inflation, trends in the money markets suggest that traders are starting to price in interest rate hikes


Benchmark bond yields have been rising since the minutes of the RBI’s April monetary policy meeting turned out to be more hawkish than expected. Photo: Aniruddha Chowdhury/Mint
Benchmark bond yields have been rising since the minutes of the RBI’s April monetary policy meeting turned out to be more hawkish than expected. Photo: Aniruddha Chowdhury/Mint

Mumbai: Call it the dawn of the rate hawks.

As the Reserve Bank of India (RBI) steps up its rhetoric on inflation, trends in the money markets suggest that traders are starting to price in interest rate hikes. Benchmark bond yields have been rising since the minutes of the central bank’s April policy turned out to be more hawkish than expected.

An increase in the benchmark repurchase rate, presently at 6.25%, would be the first since January 2014. Here are three charts that show how markets are getting prepared for a potential tightening:

The spread between the price of one-year forward contracts — in which rates to be exchanged are agreed on 12 months in advance — and the price to swap payments immediately has surged to the highest since 2011. “The widening suggests build-up of some monetary policy tightening expectations over the medium-term,” according to Nagaraj Kulkarni, a senior rates strategist at Standard Chartered Plc in Singapore.

Capital Economics predicts authorities will raise the repo rate to 6.50% in December. Goldman Sachs Group Inc. sees a 75-basis point increase during 2018, while Nomura Holdings Inc. is estimating a 50-basis point hike.

The 10-year bond yield jumped to an eight-month high of 6.99% last week. A widening of the spread between the yield and the RBI’s key repo rate typically signals the end of an easing cycle and the start of a tightening cycle, according to Vivek Rajpal, a rates strategist at Nomura in Singapore.

The gap, at 68 basis points on Monday, had surged to as high as 326 basis points in March 2010 before the central bank started raising borrowing costs. It widened to as much as 199 basis points a month before tightening began in September 2013.

The rate on one-year treasury bills, which sank to a six-year low in November following the excess liquidity created by India’s currency recall, is rebounding and has crossed over the central bank’s overnight fixing rate. The government’s borrowing costs have jumped at the last two auctions of 364-day bills. Bloomberg

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