India's swaps jump on RBI's rate hike

India's swaps jump on RBI's rate hike

MUMBAI Reuters -- India's overnight indexed swap rates jumped by 15 basis points after the central bank hiked its key policy repo rate by 50 basis points and highlighted inflation concerns.

The one-year swap rate was trading at 6.14%, up 15 bps from its previous close, while the five-year swap rate rose 16 bps to 6.32% compared to Thursday's close.

Most market participants had shifted to expectations of a 35 bps move, but 50 bps and hawkish commentary on inflation have resulted in sharp paying interest across the curve, a trader with a private bank said.

The one-year swap fell to its lowest point in three months, while the five-year swap fell to a four-month low on Thursday.

The Reserve Bank of RBI has raised the key rate on Friday, the third increase in the current cycle to cool stubbornly high inflation that has remained above the central bank's tolerance band for six straight months.

According to a trader with a state-owned bank, expectations are for the policy rate to be raised by another 50 bps, with swaps repricing accordingly in coming sessions.

The central bank has kept its inflation forecast unchanged at 6.7% for the current financial year, but it remains above the upper threshold of the target, and the governor said inflation has slowed from its April surge but remains uncomfortably high and above the upper threshold of the target.

We expect a 25 bps rate hike at the September policy review and to shift to a neutral policy stance. In a report from Barclays, we expect it to deliver one more 25 bps rate hike in December.