Stories
Swaps Signal Risk Of Outsized RBI Rate Hike To Usher In Global Rate Catch-Up
- •The Reserve Bank of India may surprise markets with a larger interest rate hike than expected on Wednesday to combat price pressures and surging global yields.
- •The 1-month overnight indexed swap is quoting at around 5.55%, sitting 30 basis points above the current 5.25% repo rate and suggesting a modest probability of a 50-basis-point hike.
- •While a Reuters poll shows most economists expect a 25-basis-point increase, bankers note that adjusting for MIBOR liquidity reveals higher market anxiety regarding a jumbo rate move.
- •Global bond yields are surging due to concerns over sticky energy prices and persistent inflation, forcing emerging market central banks to tighten monetary policy.
- •Some experts caution that a 50-basis-point hike might be an overreaction since India's inflation risks have largely been characterized as supply-side driven.
Key Questions Answered
Swap pricing and MIBOR levels suggest that the Reserve Bank of India might tighten monetary policy with an outsized interest rate hike on Wednesday to catch up with global rate increases. While a 25-basis-point hike is fully priced in, adjustments for abundant banking liquidity reveal a modest probability of a larger 50-basis-point move.
Surging global bond yields and persistently high energy prices are fueling concerns that sticky inflation will force central banks to keep monetary policies tighter for longer. This global tightening environment increasingly shapes the RBI's reaction function as policymakers confront rising price pressures and external risks
While some experts view a 50-basis-point hike as an outside risk driven by tighter global conditions and catching up with peers, others consider it an overreaction. Analysts note that the RBI has historically characterized inflation risks as largely supply-side and may see signs of generalization as too incipient for such a large initial move
