RBI Monetary Policy: This Market Indicator Is Signalling 100-150 Basis Points In Rate Hikes
The OIS market is signalling 100-150 basis points in rate hikes. Axis Bank's Neeraj Gambhir on how this will play out.
After a sharp pivot towards focusing on inflation, India's monetary policy committee may raise rates by as much as 100-150 basis points in the current cycle, suggests a key market indicator, said Neeraj Gambhir, head of treasury at Axis Bank.
The overnight indexed swaps rate, a measure of market expectation of the money market rates, went up by 30-40 basis points on Friday after the monetary policy announcement.
"The market was already building in a fair amount of policy tightening. With Friday's move, the market is building in 100-150 basis points in repo rate hikes over the next 12 months or so," Gambhir told BloombergQuint.
We had a combination of two things—the normalisation of the floor on rates by way of SDF. We also had the RBI pivoting its stance to calibrated withdrawal of accommodation from the system. This combination was reflected in the market action.Neeraj Gambhir, Head -- Treasury & Markets, Axis Bank
You could argue that the market is aggressive and the RBI will not do as much but only time will tell, Gambhir said. "Just like in the case of the U.S. Federal Reserve, once a central bank pivots, the pace at which it wants to normalise can be quite rapid. That is what the market seems to be expressing."
In Gambhir's own opinion, the central bank will look to raise rates by 75-100 basis points over the next 12 months, given the fact that the repo rate has stayed at close to 4% for awhile and there is a build-up of inflationary momentum in the economy. "Even a 100-125 basis points is quite possible."
Even if we take the repo rate to 5-5.25% over the next 12 months, the real yield will continue to be neutral to negative. So you could argue that even after 100-125 basis points over the next 12 months, the monetary policy stance would be somewhat accommodative.Neeraj Gambhir, Head -- Treasury & Markets, Axis Bank
Government bond markets reacted sharply to the RBI's monetary policy review, with the benchmark 10-year bond yield rising 20 basis points to 7.12%. Shorter-term yields also rose, as did rates on commercial paper and certificate of deposits.
There is uncertainty in the market about how much explicit support the RBI can provide to the bond market with the change in the liquidity stance, said Gambhir.
"The RBI has said it will look at calibrated withdrawal of liquidity over a multi-year period. The fact that this will play out over a multi-year period does give it flexibility to do open market operations but the size of the support will be a question mark," he explained.
I am expecting Rs 1-1.5 lakh crore in bond buying in support from the RBI in the first half of the fiscal.Neeraj Gambhir, Head -- Treasury & Markets, Axis Bank
Should the expected support from the RBI come through, the 10-year bond yield may settle between 7.25% and 7.50% assuming the rate hikes play out as expected, he said.
Watch the full interview below:
