RBI: A sharp rate hike may not be the only option going forward
Swaps are indexed overnight (OIS), a measure of future rates, showing an increase of up to 2 percentage points in the benchmark repo rate over the next two years. A sharp increase in overall funding costs could slow growth. “Any monetary tightening comes at the expense of growth and that is non-linear,” said Soumyajit Niyogi, director at India Ratings. “It will likely affect the country’s growth trajectory, especially when a reasonable lending rate is directly related to external benchmarks, such as repo. The transmission of interest rate hikes. will be faster than ever in the future.”
The total share of loans related to external benchmarks is currently estimated to be around 40% from 28.5% in March 2021 and 2.4% in September 2019.
Participants expect rates to increase in every policy
Official rate changes take effect immediately for loans linked to external benchmarks. One-year OIS yields around 5% on Wednesday, the last trading day in a truncated week, compared with 4.52% on April 7, a day before the two-month monetary policy announcement once, showing Bloomberg data compiled by the ETIG Database. Following the swap curves, participants now expect a rate increase in every policy for the rest of the fiscal, with the possibility of even a 50 bps increase at once.
The basis point is 0.01 percentage point.
“Such aggressive rate hikes in such a short period of time can have the potential to derail economic growth,” said Dhawal Dalal, Investment Manager – Fixed Income, Edelweiss MF. of India. “Incremental repo rates would probably be more ideal.”
Two years derivatives measure at 5.81% on April 13 compared with 5.17% on the day before the announcement of the RBI policy. At the review meeting, Governor Shaktikanta Das brought the focus back to inflation management, citing higher commodity prices, including motor fuel. The RBI also introduced the Permanent Deposit Fund (SDF) at 3.75%, although it kept the reverse repo rate at 3.35%.