Mumbai - Market pricing in India’s interest-rate outlook has shifted, with overnight indexed swaps (OIS) indicating that the central bank’s easing phase may be effectively over and longer-term swap rates moving higher amid expectations of firmer inflation and resilient growth.
The one-year OIS is currently at 5.50%, which is 25 basis points above the Reserve Bank of India’s repo rate. That spread suggests market participants have largely discounted further rate cuts and are beginning to incorporate the possibility of a rate increase within the next 12 months. OIS rates are viewed as the closest market-based gauge of future interest-rate expectations.
At the same time, longer-tenor swap contracts have strengthened. The most actively traded five-year OIS - a maturity that is particularly sensitive to inflation and growth projections - has risen by 23 basis points since January and now stands at 6.15%.
Those moves occur against a backdrop of the RBI revising up its near-term forecasts for both GDP growth and inflation. Reported inflation is currently subdued at 1.3% year-on-year in December and is expected to average around 2.1% in the fiscal year through March. However, authorities project that inflation will accelerate in the following financial year.
On growth, RBI leadership has pointed to ongoing capital expenditure support and recent trade agreements with the European Union and the United States as factors that should boost exports and help sustain economic momentum. Policymakers also note that the forthcoming release of inflation and growth data under a new series later this month could prompt market participants to reassess expectations.
Market strategists have responded to this intersection of an effectively exhausted rate-cut cycle, stronger domestic growth signals, and rising inflation prospects by recommending positions that benefit from a steeper yield curve. Known as "steepener" trades, these strategies seek to capture gains as the gap widens between short-term rates - which remain anchored by liquidity support - and longer-term yields, which are pushed up by higher inflation and growth expectations.
Major global banks are among those advising such positioning. Goldman Sachs, which initially advocated the trade in December, reiterated its stance after the RBI's most recent policy decision, noting that although the curve has already steepened markedly, there is still potential for further steepening in the OIS curve. Nomura has also recommended positioning for a steeper curve. Citi described conditions as favorable for a "re-steepening" of the non-deliverable overnight index swap (NDOIS) curve, citing several supporting factors.
Citi pointed to the lack of a dovish bias in the RBI policy statement, upward revisions to inflation forecasts, a better external outlook arising from trade deals, and hawkish stances among Asian central banks as likely drivers of re-steepening in the NDOIS curve.
With short-term swaps remaining anchored by ongoing liquidity provision and longer tenors reacting to shifting inflation and growth expectations, market participants and risk managers are weighing curve trades and duration exposure carefully ahead of the new data series and any further central bank guidance.