Hawks take hold in India as RBI policy looks set to tighten

INSUBCONTINENT EXCLUSIVE:
By Subhadip SircarThe interest-rate cycle in India is turning
The central bank may be set to tighten policy next week to keep inflation in check and stem the declines in the rupee, if the rate-market
moves are any indication. The Reserve Bank of India hasn’t tinkered with rates since August, and even cut inflation projections last
month, raising expectations that borrowing costs would remain on hold
But a surprising hawkish tilt revealed in its April policy minutes and the recent spike in oil has boosted speculation the authority may
lift rates at its June 6 meeting. “Front-end bonds are fully pricing in a 25-basis point hike in June,” said Suyash Choudhary, head of
fixed income at IDFC Asset Management Co
in Mumbai
“Even accounting for some higher supply absorption premium, one can say that a 75-basis point increase seems to be comfortably discounted
over the next year.” Here are four charts that show how markets preparing for a potential tightening: The gap between the 10-year
government bond yield and the RBI’s benchmark repurchase rate widened as much as 190 basis points earlier this month, the most since 2013
It stood at 172 basis points on Wednesday. “The spread typically widens at the start of the tightening cycle,” said Vivek Rajpal, a
rates strategist at Nomura Holdings Inc
“It indicates that the hike cycle is about to begin.” The spread has tended to be a reliable indicator of a turn in interest-rate cycle
in the past
The gap increased as much as 326 basis points in March 2010, before the RBI started raising borrowing costs
It widened to as much as 199 basis points a month before the authority began to tighten in September 2013. Short-tenor bonds have
underperformed recently, causing the yield curve to flatten
That’s because investors fear a near-term increase in interest rates as the price of oil -- India’s top import -- remains elevated after
the recent slide
Standard Chartered Plc
expects the RBI to tighten by 25 basis points each, in June and August
HSBC Plc is also factoring in two increases. “The current bear-flattening is due to rate hike expectations and lack of demand,” said
Nagaraj Kulkarni, Asia rates strategist at Standard Chartered Bank in Singapore
The curve will steepen if the central bank sounds hawkish, and the market starts preparing for two to three increases, while a dovish hike
may cause it to flatten, he said. The spread between the price of one-year forward contracts, in which rates to be exchanged are agreed on
12 months prior, and the price of immediate swap payments has surged to the highest since 2011
That typically signals higher rates going ahead. Offshore swap markets are pricing in the most rate hikes in India among Asia countries over
the next year
The Philippines may increase the policy rate “some more” if economic data shows it’s warranted, Governor Nestor Espenilla said Monday
The country raised borrowing costs earlier this month, the first since 2014
Indonesia may be headed for a second hike in as many weeks on Wednesday to stem a rout in the rupiah. “Taking a leaf off the regional
policy action, need to contain volatility and high core inflation suggest that the RBI has sufficient reasons to hike rates in the June
meeting,” DBS Bank Ltd
said in a note Wednesday.