Derivative trades hint repo rate could rise to 6.5%

A derivatives trade indicator showed that we could see the Reserve Bank of India’s repo rate hike of up to 6.5% in the upcoming days. This points towards greater inflation in the cost of funds for borrowers. In other words, loans could become more expensive soon.

As per the Bloomberg Data compiled by the ET Intelligence Group, the one-year Overnight Indexed Swap (OIS) returned 6.62% in September 2022 versus 6.64% in December 2018. This has led to speculation among traders that the cycle for a repo rate hike may take longer.

The RBI’s benchmark repo rate, which is now pegged at 5.40%, was projected to peak in the range of 6% to 6.25%. Industry experts believe that this certainly is an indicator of a higher terminal rate. As a result, all central banks in the world, including the RBI, could announce rate hikes in the upcoming days, which can also raise the inflation rate higher.

Apart from the RBI, even the US Fed can raise the fund rates by 100 basis points rather than 75 basis points, as anticipated earlier. In fact, the US inflation print for August 2022 stood at 8.3%, which is more than the average market expectation.

For companies, a hike in the repo rate could mean that they have to fork out the higher cost of funds for their business, which could lead to an increase in market rates of commodities. The result of the expected rate hikes can already be seen on the market, with most of the stocks spiking since August.

On the other hand, retail inflation bounced to 7% in August against 6.71% a month before. The RBI has projected the inflation rate for the July-September quarter at 7.1%. The inflation rate peaked at 7.8% in April this year.

The rate hike expectations have also led to a spike in the public sales of debt instruments, including treasury bills and shorter-period sovereign securities.

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