Repo rate may increase to 6.5%, according to derivative transactions


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A futures market measure indicated that India’s key policy rate may increase to at least 6.5% in the current tightening cycle, signalling additional inflation in the cost of money for borrowers who had originally pencilled in rates to peak earlier – and at a level lower – than expected today.

The Overnight Indexed Swap (OIS) for one year has risen to 6.62%, the highest level in 45 months. According to ETIG-compiled Bloomberg data, the one-year OIS yield was 6.62% on December 18, 2018, compared to 6.64% on that day.

Dealers now think the rate peaking cycle will last longer as a result of this. The benchmark repo rate, which is currently fixed at 5.40%, was once projected to peak between 6% and 6.25%.

Ashhish Vaidya, managing director of DBS Bank, said that it “is unquestionably signalling a higher terminal rate.” “Inflation should become sticky as a result of the pass-through effect. Because of this, central banks around the world, including the RBI, are front-loading rate increases.”

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