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Traders watch RBI withdraw monetary stimulus as currency exchange rates rise

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Traders globally are betting that central banks will have to raise rates faster than anticipated.

New Delhi: Swap rates in India are rising in a sign that traders expect the central bank to withdraw the monetary stimulus faster than expected, despite its assurances.

The five-year onshore overnight indexed swap, a tool for trading rate expectations, rose 31 basis points to 5.64% in October. It is poised for the biggest monthly gain since February when the government said the economy had pulled out of recession before the outbreak of the delta variant.

Traders globally are betting that central banks will have to raise rates faster than anticipated as inflation spiked in the pandemic era. While price pressures in India have eased in the past few months, economists expect it to rise again due to a jump in global energy prices, which could influence RBI policy decisions.

“The swap market is telling us that the RBI may be behind the curve,” said Vijay Kumar Sharma, senior executive vice president, PNB Gilts Ltd. “The idea is that inflation will be high and there will be a huge increase in rates.”

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Inflation has risen faster than expected in other countries, with Australia reporting gains on Wednesday, triggering a sell-off in bonds. Last week, price pressure in New Zealand prompted a similar reaction.

According to a note by DBS Bank Ltd, in India, while the CPI is witnessing moderation in October to November, it will move towards 6% in the next quarter. currency, it said.

As a result of the jump in India’s swap rates, the spread with five-year bond yields is approaching zero, up from around 80 basis points in the prior year. One-year onshore overnight indexed swap rates have also risen 29 basis points this month.

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According to estimates by Nomura Holdings Inc., India imports about 85% of its oil requirements, and high energy costs could add 100 basis points to its headline inflation over the next six months.

At the October policy review meeting, RBI Governor Shaktikanta Das said he would halt a program to buy government debt, which would surprise traders. Das, however, was careful to avoid any talk of rate hikes and insisted on a continuous adjustment policy.

Nagraj Kulkarni, senior Asia rates strategist at Standard Chartered plc, said swaps indicate that the overnight rate could rise by around 150 basis points in the next year due to liquidity conditions and changes in policy rates. The lender sees this an increase of 100 basis points.

The overnight fixing rate on Tuesday was 3.48%. Citigroup Inc has also opened its offshore OIS Curve stiffener business amid concerns about prolonged inflation.

Citigroup analyst Gaurav Garg said in a note to clients, “Global reassessment of higher energy prices and policy normalization expectations have also flattened India’s swap curve.” “Even though the growth focus of the RBI MPC is clear, ongoing concerns over inflation globally and some central banks are reluctant to give in to price pressures, forcing market participants to open receivers indiscriminately in the short term.”

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