Swap markets signal RBI could do more than just a 25-bp rate cut this week

India's overnight indexed swap (OIS) rates have fallen in the last three sessions, signaling that besides just a quarter-point rate cut this week, the central bank could also change its stance or opt for a bigger reduction.

OIS rates, the closest gauge of interest rate expectations, have dropped by 11-12 basis points (bps) in three trading sessions since the U.S. slapped duties on India last Wednesday as part of an expansive tariff plan.

The one-year OIS rate stands around 5.88%, its lowest level since May 2022, while the five-year rate is around 5.71%, its lowest since February 2022.

While a 25-bp rate cut is already priced in at the Reserve Bank of India's (RBI) monetary policy decision on Wednesday, traders are seeking some additional policy support after the tariff announcement stoked fears of a growth slowdown.

"A 25-basis point rate cut with a change in policy stance to "accommodative" (from "neutral") has now become a higher possibility, while a rate easing of 25 bps with no change in stance is now a low possibility event," said Alok Sharma, head of treasury at foreign bank ICBC.

DBS also expects a change in stance to "accommodative", along with a 25-bp reduction. 

The RBI started its rate cut cycle for the first time in nearly five years in February.

Indian officials expect their growth projection of 6.3-6.8% to hold, but economists see a 20-50-bp hit to growth in the ongoing financial year that started on April 1.

Citigroup, which expects a 50-bp hit to growth, said it assigns "a very small probability of a 50-bps cut in the April meeting."

The immediate focus should be on creating the right preconditions for better transmission of monetary easing, Citi's India chief economist, Samiran Chakraborty, said in a note.

The RBI could also signal a dovish tilt by giving greater assurance to the market regarding comfortable liquidity conditions, according to traders and economists.

Ahead of the policy review, bankers have sought comfort on the availability of overnight liquidity up to a certain percentage of deposits.

Meanwhile, surplus banking liquidity conditions over the last few days have already pushed overnight interbank call money rates towards the lower end of the monetary policy corridor, delivering a stealth rate cut.

The weighted average call rate has moved closer towards the Standing Deposit Facility rate, which is at 6.00%, after remaining above the repo rate in March, while money market rates have plunged.