The market’s hawkish tail is growing ahead of Wednesday’s Reserve Bank of India decision. The 1-month OIS rate hit 5.55 percent, its highest since April 2, implying significant probability of a larger-than-consensus move. State Street’s Krishna Bhimavarapu assigns a 33 percent chance to a 50bp hike, while bankers adjusting for the MIBOR basis put it near 25 percent. Most economists still expect 25bp to 5.50 percent.
The RBI’s own operations are adding to the hawkish read. The central bank conducted an overnight variable rate reverse repo auction on October 6 for a notified 2.50 lakh crore rupees, drawing 1.92 lakh crore in bids at a 5.24 percent cut-off. The Hindu BusinessLine characterized the enlarged quantum as priming the market for a hike a day ahead of the decision. The RBI has announced another overnight VRRR for October 7, the morning of the decision itself.
The rupee has hit a two-month low as Asian currencies eased against a firm dollar. J.P. Morgan’s Sajjid Chinoy cautioned that 50bp would be an overreaction, arguing for 25bp, but the swaps market is hedging against the central bank validating the region’s more aggressive tightening rhythm after Indonesia’s 100bp of hikes over May and June.