Asia FI & FX Strategy Viewpoint: India Rates: Tug-of-war between RBI and markets

Research evidence excerpt

Asia FI & FX Strategy Viewpoint: India Rates: Tug-of-war between RBI and markets

vestments Glossary:

imbalance (and wider CAD) does call for higher interest rates, if FX stability were the key

mandate for RBI. CA: Current account

What’s priced vs what’s fair? ECB: External commercial borrowing loans

Currently, the market has swung towards 4x hikes by end of this year (assuming 5-10bps EM: Emerging markets

fixing spread) and a total of 5-6x hikes over 1y period. But RBI’s wait-and-see approach

would likely mean a delayed start to hiking cycle as inflation pressures show up. We FDI: Foreign direct investment

believe the risks are somewhere in the middle as the market would price 1-2x excessive

IGB: Indian government INR bond

hikes due to distribution of risks during a hiking cycle. That would mean pricing usually

fluctuating between 2-4x over 1y, with opportunities to fade when it crosses either INR: Indian rupee

extreme. A delayed start would also argue for pushing-back current pricing of hikes in 1y

tenor, resulting in lower 1y closer to 6% and 1s2s curve steepening. NDOIS: Non-deliverable overnight indexed

swap

Trade - Fade extremes around 2-4x hikes NEER: Nominal effective exchange rate

We recommend receiving INR NDOIS 1y spot (entry 6.31%, target 6.0%, stop 6.6%, carry

9bps/month) to fade extreme market pricing of rate-hikes in the front-end, against ODI: Outward direct investment

possibility of a delayed hiking cycle as RBI awaits additional data for validation and

doesn’t react to market pressures on FX. Liquidity tightening may continue to move OMO: Open market operations

fixing higher but front-end rates have already priced fixing moving to upper-bound of RBI: Reserve Bank of India

policy corridor by next month. Risk to the trade comes from RBI hiking more