A further rate cut may be delayed, going by the indices

Mumbai: Overnight indexed swaps (OIS), a measure of the market expectations on interest rates, are on the way up less than a week after RBI cut rates by 25 basis points indicating that dealers do not expect further rate cuts anytime soon. One basis point is 0.01 percentage point.

Risks building due to expectations of a below normal monsoon, higher crude oil prices and slower global growth have pushed back expectations on rate cuts for the rest of the year. Bankers expect that the next rate cut could be anywhere between three and six months.

The one-year OIS swap, a measure of short-term interest rates has moved up from 5.91 per cent at the end of March to 6.08 per cent a week after the monetary policy committee (MPC) announced a 25 basis point cut in repo rate on April 4.

“Rates have moved up because markets were positioning for a 50 to 75 basis point cut and a more dovish policy. We got a cut but the stance remained at neutral. Higher oil, the uptick in overseas interest rates, uncertainty over monsoon and doubts over global growth are also playing a part,” said Ashish Vaidya, head trading at DBS Bank. The OIS is a derivative instrument used to hedge interest rate risk to prevent losses when rates turn volatile quickly. The uptick in the rate means traders do not expect rates to move down in a hurry.

Dealers point out that though the MPC voted 4-2 in favour of a 25 bps cut, the vote to keep the policy stance at neutral was tighter at 5-1, contrary to market expectations of a shift to a looser accommodative stance.

“There are some questions over the monsoon and some risks building up on the fiscal side after the elections especially if global growth slips, all these are weighing on the market. Expectations now are that a rate cut will take more time to fructify. We are in for a pause for now,” said Arun Khurana, head treasury at IndusInd Bank.