India swap market prices in aggressive rate cuts by central bank in FY26

MUMBAI: With inflation close to the Reserve Bank of India’s target and growth weak, the country’s overnight indexed swap (OIS) markets have started pricing in far more aggressive rate cuts by the central bank than previously anticipated.

OIS rates, the closest gauge of interest rate expectations, have eased by 10-15 basis points so far in March, with the absolute levels hinting at more than 50 basis points of rate cuts cumulatively over the next 12 months.

India’s fiscal year 2025-26 begins on April 1.

“Inflation in the current quarter is tracking 50 bps lower than RBI forecast and that should provide the central bank a lot more conviction on the outlook for next year,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

“RBI may not wish for real policy rates to increase at a time there are downside risks to growth from global factors.”

The primary dealership was expecting a shallow cycle of 50 bps cuts earlier, but now sees 75-100 bps of easing.

The one-year OIS rate stands around 6.10%, its lowest level since August 2022, while the five-year rate was around 5.90%, near its lowest level since March 2022.

“We continue to expect RBI to pivot towards growth. We now forecast RBI to cut rates by 25bps in April, and again in August and December, bringing the repo rate to 5.50%,” Japan’s MUFG Bank said in a note.