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Informist, Wednesday, Aug. 5, 2026

 

--Gilt dealers: Not seeing MPC hike repo in Oct unless US FOMC raises rates 

--Some gilt dealers don't see repo rate hike 2026 post RBI Malhotra remarks 

 

MUMBAI – Expectations of a hike in the repo rate by the Reserve Bank of India's Monetary Policy Committee at its October meeting faded post a neutral policy outcome by the rate-setting panel Wednesday, traders in the government bond market said. RBI Governor Sanjay Malhotra indicated little urgency for a rate hike in the near term, with commentary inferred as 'balanced', 'neutral' to mildly 'dovish', dealers said, compared with expectations of a slightly more restrictive tone. A rate hike in India is only seen likely if the US Federal Reserve Open Market Committee begins raising its policy rate, to protect the interest rate differential between the two economies, dealers said.

 

"Listening to him (RBI governor) today (Wednesday), I don't think he is planning for any hike in at least the foreseeable future," a dealer at a private sector bank said. The one-year overnight indexed swap rate was down 12 basis points Wednesday post the policy statement, while also tracking an overnight fall in oil prices. 

 

Some traders do not see the need for the MPC to hike the repo rate in the entirety of 2026, provided the US FOMC leaves rates unchanged. Malhotra Wednesday said the MPC observed that CPI inflation is likely to peak in the December quarter and then moderate. The central bank Wednesday slightly lowered its 2026-27 (Apr-Mar) CPI inflation forecast to 5.0% from 5.1% previously. Traders expect the rate-setting panel to remain vigilant, but inflation is now seen as less of a concern for the panel to take a rate action on, they said.  

 

"...We continue to retain our call of 50 bps of rate hike starting December 2026 (25 bps in Dec and 25 bps in February 2027). Still, given the dovish guidance today (Wednesday), we believe a hike has been ruled out in October. However, the incoming domestic data and the evolving narrative around Federal Reserve's outlook remains key to watch," BofA Global Research said in a report post the policy statement.

 

Market participants observed a sharp shift in the governor's approach to inflation in his commentary Wednesday. The governor emphasised on core inflation, saying that it remains benign, and will moderate after peaking in the December quarter. Malhotra signalled a larger focus on core inflation being much lower even as headline CPI inflation is seen above the 4% target in 2026-27 (Apr-Mar), dealers said. There was little sign of 'generalisation' of price pressures barring food and fuel, the governor said. The governor, however, reiterated that headline inflation is the central bank's target, not core inflation. 

 

"This time, policy was on expected lines. Only one point (of difference is) that generalisation of inflation; earlier RBI maintained a stance that a slight bit of spill-over (of oil prices) is there but today the view came that there is no generalisation of inflation," a senior banker at a state-owned bank said.

 

Even as traders price in rate hikes to match global macroeconomic changes, and an inflation forecast above the 4% target, the RBI indicated it was in no hurry to do so, they said. The one-year OIS is roughly pricing in about 64 basis points of rate hikes within 12 months, which is fairly priced, some dealers said, from about 70 bps Tuesday. However, most of the fall in swaps Wednesday was due to an overnight fall in oil prices. Pricing linked to inflation expectations more than the RBI's commentary is likely to limit a fall in swaps in the near term unless oil prices fall significantly, dealers said. Traders are likely to step in to pay on dips in swaps and hedge other instruments, dealers said. However, the five-year government bond yield has scope to fall further, after falling 9 bps Wednesday, due to deployment of foreign inflows into gilts while traders unwind bets of a rate hike in October, they said.   End

 

US$1 = INR 95.1175

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Cassandra Carvalho

Edited by Akul Nishant Akhoury

 

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