New Delhi: Swap rates are rising in India, suggesting that traders expect the central bank to pull back monetary stimulus faster than expected despite its pledges.

The five-year onshore overnight indexed swap, a tool for Determination of trade rate expectations, rose 31 basis points to 5.64% in October. It’s poised for the biggest monthly gain since February, when the government said the economy was out of recession before the delta breakout.

Traders around the world are betting that central banks will have to hike rates faster than projected as pandemic-era inflation sets in. While price pressures in India have eased in recent months, economists believe that it will rise again mainly due to the rise in global energy prices, which could influence the monetary policy decision of the Reserve Bank of India.

“The swap -Market tells us that RBI may fall behind the curve, “said Vijay Kumar Sharma, Senior Executive Vice President at PNB Gilts Ltd. “We assume that inflation will be higher and there will be steep rate hikes.”

Inflation has risen faster than expected in other countries, with Australia on Wednesday reporting gains that led to a bond sell-off . Last week, price pressure in New Zealand had a similar reaction.

In India, the CPI will weaken from October to November, but according to a statement from DBS Bank Ltd it will rise again to 6% in the next quarter. it said.

As a result of the rise in Indian swap rates, the spread on five-year bond yields of almost 80 basis points is approaching zero at the beginning of the year. The one-year onshore overnight indexed swap rates are also up 29 basis points this month.

India imports about 85% of its oil needs, and higher energy costs could, according to estimates by Nomura Holdings Inc.

At the review meeting Politicians in October said RBI Governor Shaktikanta Das would stop a government bond purchase program, which surprised traders. However, the company was careful not to mention rate hikes and emphasized an ongoing accommodative policy.

Swaps suggest that the overnight rate could rise by around 150 basis points over the next year due to changes in liquidity conditions and key interest rates, said Nagaraj Kulkarni, Senior Rate Strategist, Asia at Standard Chartered Plc. The lender sees an increase of 100 basis points.

The overnight fixing rate was 3.48% on Tuesday. Citigroup Inc. has also stopped its offshore OIS curve steepener trading due to concerns about prolonged inflation.

“Higher energy prices and a global reevaluation of expectations to normalize policy also have the Indian swap curve overcome, ”wrote Citigroup analyst Gaurav Garg in a customer note. “Even if RBI MPC’s focus on growth is still evident, ongoing concerns about global inflation and some central banks reluctant to give in to price pressure are causing market participants to indiscriminately transact recipients with short maturities.”

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