Clipped from: https://www.thehindubusinessline.com/money-and-banking/overnight-indexed-swap-rates-indicate-one-two-more-repo-rate-hikes/article66572870.ece
Overnight Indexed Swap rates indicate the terminal rate could be 7%: Bank of Baroda Chief Economist
Madan Sabnavis, Chief Economist, Bank of Baroda | Photo Credit: EMMANUAL YOGINI
The present array of Overnight Indexed Swap (OIS) rates indicates that there could be one-two more policy repo rate hikes with the terminal rate being 7 per cent, according to Bank of Baroda Chief Economist Madan Sabnavis.
An OIS, which is a measure of monetary policy expectation, is an interest rate derivative contract in which two entities agree to swap/ exchange a fixed interest rate payment (the OIS rate) for a floating interest rate payment computed over a notional principal amount during the tenor of the contract.
The floating rate is usually the overnight (unsecured) interbank rate (the reference rate for Indian OIS contracts is the Mumbai Interbank Outright Rate/MIBOR rate).
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Sabnavis observed that post the February monetary policy review, the 6-9 month OIS rate was indicative of the repo rate at 6.75 per cent being on the radar this year. Currently, the repo rate is at 6.50 per cent.
“There have been developments post policy like the inflation number (for January) coming in at 6.5 per cent and the Fed and ECB sounding more determined on controlling their inflation numbers. The 22nd February two months OIS suggests a rate hike in April,” he said.
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Post the September 30 policy, OIS rates were indicative of the repo rate going past the 6.50 per cent mark, he added.
“Given that inflation is quite tough right now and there are talks of El Nino, which will pressurise prices during the course of the year, it will be interesting to see how the MPC reacts given that two members were not in favour of a rate hike last time.
“We believe that the February inflation number will be important. If it comes again at 6.5 per cent, then a rate hike may be expected. Anything below will be a touch and go!” Sabnavis said.
Published on March 2, 2023