DBS On INR Rates Ahead Of RBI, +25bps Not Fully Priced

DBS notes markets are not pricing in a 25bps hike from the RBI today, although the economist consensus is in the +25bps camp... "Majority of forecasters (~80%) are calling for a 25bps rate hike today, with the remaining calling for a pause. Comparatively, OIS swaps are less certain and are currently pricing a lower ~50% chance of 25bps hike. Considering that a hike has not been fully priced in, 1Y OIS could rise 5-10bps in the event of a hike today (we are in the hike camp). For this cycle, RBI has been one of the more aggressive hikers in the region with cumulative 250bps of hikes to the policy repo rate. And thus, we think it is fair that OIS swaps are pricing for a shallow cut cycle to begin in 1Q next year. However, in the event that RBI's stance and tone today turn out to be more hawkish for inflation reasons, we think the OIS curve could push back the timeline of expected cuts and 1Y-2Y curve segment would steepen (spread could bounce from historically negative levels). The risks of markets adding more rate hike expectations and pricing for a higher terminal rate (higher than 6.75%) are low in our view, especially as the US Fed is seen as likely to start cutting rates in 2H."