A slower-than-expected inflation decline in the US and sobering Federal Reserve commentary on when its much-awaited policy easing may start has also prompted Indian traders to reduce their bets on how much rates the RBI will cut this year.
“August would still be on the table for a rate cut but earlier the OIS curve was clearly suggesting a 50 basis point (bps) cut in August,” said Vikas Goel, MD and CEO, PNB Gilts. “Now it reflects hesitation – it looks like it is more inclined towards 25 bps, liquidity has also become tight again.” A basis point is 0.01 percentage point.
On Wednesday, the one-year OIS rate was last at 6.74%, while the five-year OIS rate was at 6.37%, Clearing Corporation of India data showed. On February 2, a day after the presentation of the budget, the one-year and five-year OIS rates were at 6.60% and 6.14%, respectively.
“OIS suggests that rate cuts could still start in August or October, but now the pricing suggests one-and-a-half cuts,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership. “Earlier, the expectation was that rate cuts could start in June and the curve had priced in around three rate cuts one year down the line.”In its policy statement on February 8, the RBI emphasised that inflation needs to durably move to its 4% target and that vigilance on food prices was warranted. Traders, who had hoped for signs of the RBI indicating that it might tolerate easier liquidity conditions in the banking system, were left disappointed with the central bank’s firm tone on keeping financial conditions tight.This was all the more so as the government adhered to fiscal consolidation in the budget, a step perceived as being non-inflationary.”We think the RBI is in no rush to ease via liquidity, stance or rates; and while we expect some easing in 2H (second half) 2024, it will likely be limited to 50 bps,” wrote HSBC’s economists.
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