Mumbai: Rates traders in India seem convinced record-low inflation and an unexpected slowdown in economic growth will prompt the central bank to soften its hawkish stance when it announces its policy decision Wednesday.

That’s even as some recent surprises by the Reserve Bank of India (RBI) have caught them on the wrong side of the trade. Another jolt now could cause the one-year forward-swap contract, which is fast converging with the benchmark repurchase rate, to reverse course, and also prompt the benchmark sovereign-bond yield to rebound from near a two-month low.

“Market expectations are for softening of the monetary policy panel’s hawkish tone," said Nagaraj Kulkarni, a senior rates strategist at Standard Chartered Plc in Singapore. “If that doesn’t happen, then the market will be disappointed and we might see an uptick in bond yields."

Here are three charts to show the market behaviour ahead of the policy meeting:

One-year forward swap contracts, in which rates to be exchanged are agreed on 12 months in advance, have slipped 20 basis points since official data on 12 May showed India’s consumer inflation rate slowed to a record in April. They were at a 14-month high in early May.

The central bank will undershoot its fiscal first half CPI target of 4.5% by 130 basis points, according to a Kotak Mahindra Bank Ltd. note dated May 24.

“At the beginning of May, the market was pricing the next move to be a rate hike to occur over the next one year," said Vivek Rajpal, a rates strategist at Nomura Holdings Inc. in Singapore. “That has been priced out."

The gap between the 1-year treasury-bill and CPI inflation rates—an indication of real interest rates in the economy—is at 345 basis points, the highest since late 2015. The RBI said in October that a spread of 125 basis points was good to be looked at as a neutral real rate, which leaves ample room for the monetary authority to manoeuvre benchmark borrowing costs.

The RBI will keep the repo rate unchanged at 6.25% this week, according to the median estimate of 25 economists surveyed by Bloomberg. Even so, the benchmark 10-year yield fell to its lowest since early April last week and has held near that level, driven by expectations of a change in the central bank’s stance. Data that showed India’s economy grew at the slowest pace in more than two years in the first quarter has only boosted those expectations and contributed to the decline in yields. Bloomberg