India’s overnight indexed swaps (OIS) indicate that the Reserve Bank of India’s rate-cut cycle may have ended, with markets beginning to price in the possibility of a rate hike over the next year.
The one-year OIS stands at 5.50%, about 25 basis points above the RBI’s repo rate, suggesting expectations of tighter policy ahead. Meanwhile, the five-year OIS — sensitive to inflation and growth outlook — has climbed 23 bps since January to 6.15%, reflecting firming long-term expectations.
The shift follows the RBI’s upward revision of GDP growth and inflation forecasts. While retail inflation remained subdued at 1.3% year-on-year in December and is projected at 2.1% for the current fiscal, it is expected to accelerate in the next financial year. Strong capex spending and new trade agreements with the EU and US are also seen boosting growth momentum.
With short-term rates anchored by liquidity support and long-term rates rising, analysts at Goldman Sachs, Nomura and Citi are recommending “steepened” trades, anticipating further widening between short- and long-term swap rates.