Rate swap traders bet on 50 bps cut in February on global dovish tilt
Reserve Bank of India's commentary and inflation forecasts may not provide visibility on when rates may fall but swap traders are betting on a 50 basis-point cut in local borrowing costs starting February 2025 as central banks globally start tilting towards a softer monetary policy.
A basis point is a hundredth of a percentage point.
Overnight indexed swap (OIS) rates, the principal financial market tool for betting on interest rate expectations, have fallen by 20-30 basis points in the past month, with their current levels reflecting the start of a policy easing cycle by the central bank in the first quarter of 2024.
«The relevant swap is the one-year OIS, which is hovering around 6.53%. The compounding is around 22 basis points, so effectively the fixing for it to break even needs to be around 6.25-6.30%. If we go with that, then it's factoring in a rate cut of around 50 basis points (bps) after six months,» said Vikas Goel, managing director of PNB Gilts.
«If the US Federal Reserve delivers a 100 bps rate cut, then it strengthens the case for the RBI to start cutting around February. OIS seems to be saying that in the first quarter, we will have at least a 50 bps rate cut,» he said.
The one-year OIS rate, which closed at a weighted average rate of 6.51% on Wednesday, was at 6.74% a month ago. OIS is a derivative instrument using government bonds as underlying. It is the main tool for hedging interest rate risk in India, with entities swapping fixed rates and floating rates based on their view of where
