India rate cut bets pushed to mid-2024

The recent rise in inflation has prompted Indian investors to push back rate cut expectations by at least a quarter to the middle of 2024, with a sustained rise in prices likely to prompt a further repricing, traders and analysts said on Monday.

Surging food prices accelerated India's annual retail inflation rate in June to 4.81 per cent, above the polled estimate of 4.58 per cent, snapping four months of easing.

"Rate cut bets are getting re-priced as markets are now expecting inflation to overshoot above 6 per cent in July and upward pressure in the coming quarter," said Madhavi Arora, lead economist at financial services firm Emkay Global.

"The bet for the first cut has been shifted by at least one quarter to June 2024," she added.

Three senior traders at private and foreign banks agreed.

India's 1-year overnight index swap (OIS) rate currently stands at 6.75 per cent, above its 2023 low of 6.49 per cent reached in May when market was expecting the RBI to cut rates in February or April of 2024.

"There is absolutely no rate cut in the OIS 1-year price anymore," a senior trader at a foreign bank said, adding that "no one would have bet on a rate cut in India through 2024," if rate cuts in the United States were not a consideration.

Inflation has hit the lowest and is likely to continue to hover around current levels or edge slightly higher from here on, the trader who did not wish to be named as he is not authorised to speak to the media added.

Vegetable prices, on a consumer price index weighted basis, have risen 25 per cent month-on-month in July, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

"This could push July CPI inflation to somewhere close to 6.3-6.4 per cent," he said.

Inflation is seen staying close to 6 per cent in August as well, before cooling, likely prompting India's rate setting panel to keep rates on hold for longer.

"The market for now expects the Reserve Bank of India (RBI) to look through these prints as it is isolated to vegetable price inflation, the seasonality of which is well known and unlikely there will be any second-round effects due to that," a senior trader at a private bank said.

"Also, since WPI continues to soften, soft goods inflation will keep core inflation steady," the trader added.

The RBI has raised rates by a total 250 basis points since May last year and has reiterated its commitment to bringing inflation down to 4 per cent over the medium term.

"OIS market is now pricing in a rate cut only around August next year," said Upadhyay. "Apart from the inflation picture, the growth picture has also impacted rate cut expectations. Since growth has held up reasonably well so far, there is limited need to cut rates."