Overnight swaps suggest RBI likely to hold interest rates through 2024

Indian overnight indexed swap (OIS) rates have moved higher since the Reserve Bank of India's latest policy meeting on Friday, suggesting investors now expect a rate cut only in early 2025 as opposed to the last quarter of 2024 earlier.

The one-year OIS rate, the most commonly used indicator to gauge interest rate expectations, was at 6.82 per cent by 0700 GMT, its highest since December 13. The five-year rate was at 6.48 per cent, also its highest in four months.

OIS markets reflect interest rate expectations, with higher rates indicating elevated interest rates for a longer period.

"In our view, the Monetary Policy Committee (MPC) should not be thinking of rate cuts at this stage at all, and should wait for more information about domestic and global conditions before thinking of stance change and rate cut," said A Prasanna, head of research at ICICI Securities Primary Dealership.

The central bank's MPC held rates steady on Friday as expected, for a seventh straight policy, as growth was seen staying robust while inflation has remained above its 4 per cent target.

Robust growth will allow the RBI to focus on the last mile of disinflation towards the target, which is most challenging, Governor Shaktikanta Das said.

Traders said the market viewed the commentary from the Governor and other central bank officials as slightly hawkish, prompting the one-year swap rate to move up more than 20 basis points since the Feb. 8 meeting.

ICICI Securities PD sees a risk of a delayed start to rate easing, with a reasonable probability of a status quo in the current calendar year.

Apart from the RBI's rhetoric about meeting the 4 per cent inflation target, traders also think the market expectations of easier liquidity conditions in April-June may not meet estimates, a trader with a foreign bank said, adding that this was also pushing up swap rates.

"Mathematically, we can foresee one rate cut in the one-year swaps, but that is largely towards the end of the financial year, probably in January-March," said Alok Singh, group head of treasury at CSB Bank.