Bank of America’s top India trader says swap market too hawkish

Bank of America’s top India trader says swap market too hawkish

Indian rates traders have pushed back expectations for an interest-rate cut way too far and that creates an opportunity in the swaps market, according to Bank of America Corp.

The Reserve Bank of India is likely to cut the key policy rate by 100 basis points in the next two years, while interest rate swaps are not pricing in any cuts at all during the period, Vikas Jain, head of India fixed income, currencies and commodities trading, said in an interview. Traders are putting too much emphasis on geopolitics and not enough on easing price pressures locally, he said.

“The market has priced out any rate cut for the next two years because of the geopolitical tensions,” Jain said in Mumbai. “Even though globally inflation remains a concern, our inflation trajectory seems better and the next move by RBI will be a cut.”

Investors should position for a drop in the two-year overnight index swap, which may decline by up to 35 basis points over the next year, according to Jain. It traded at around 6.65% on Tuesday, having risen nearly 40 basis points this year amid the global higher-for-longer rate narrative.

Markets globally are repricing wagers for a cut in interest rates by the Federal Reserve amid hawkish remarks by the US rate-setters. That has hit bonds and currencies of emerging markets in recent weeks, including India and Indonesia.

The two-decade bond veteran believes inflation will trend lower to the Reserve Bank of India’s projection of 4.5% this year, with food inflation likely remaining contained as rainfall projections look good, he said.

Below are some excerpts from the interview:

Shelter from volatility
“Indian assets like the rupee and sovereign bonds are a shelter from the volatility that we’re seeing at this point in time,” he said. “We’ve seen many investors put in a relative value trade of long rupee versus other Asian peers.”

India government bonds
“Bonds also look very attractive at these levels given the index inclusion inflows. The 5-year to 7-year bucket looks very attractive as carry is going to remain positive with RBI keeping liquidity around neutral levels, and the overnight rate will remain closer to the policy rate.”

Foreign exchange reserves
“The RBI will continue to accumulate reserves,” he said. “We remain quite constructive on the rupee going forward, especially on a relative basis among Asian peers.” The rupee may trade in the 82.5-84 per dollar range this year, he added.