Sharp fall in OIS rates leads to deeper rate cut speculation

Since the imposition of tariffs by US President Donald Trump, rates on the overnight indexed swap (OIS) fell sharply by around 10-15 basis points (bps), leading to speculations that the Reserve Bank of India's (RBI) rate cuts will be higher than anticipated, money market experts said.

According to Bloomberg data, rates of 1-year OIS fell to 5.8800 percent on April 8 from 5.9930 percent on April 2 -- before the announcement of tariffs by the US.

Similarly, rates of the 2-year OIS fell to 5.7000 percent on April 8 from 5.7900 percent on April 2, and 5-year OIS rates fell to 5.7712 percent on April 8 from 5.8400 percent on April 2, data showed.

The OIS market is a derivative market for government bonds, allowing investors to hedge against interest rate fluctuations.

“Since the last RBI meeting, India's 1-year swap onshore OIS declined from 6.34 to 5.88, implying more rate cuts from the central bank.  That will lower the finance cost for the EMIs of loans in the coming months,” said Dilip Parmar, research and forex analyst at HDFC Securities.

There is wide speculation in the market that the RBI will cut repo rate by 25 bps in its April policy, and by 25 bps in June. But experts said that OIS rates are suggesting more than 25 bps rate cut in April.

The speculation about a rate cut emerged after retail inflation dropped below the RBI’s medium- term target of 4 percent and concerns over growth amid US tariffs. It opens up a wider space for the central bank to act on rates.

A Moneycontrol’s poll of 21 economists, treasury heads and fund managers showed that the RBI is expected to cut the repo rate by 25 bps in the upcoming monetary policy on April 9.

India has been facing growth challenges – despite a rebound in the third quarter of the financial year 2024-25 – which have now been exacerbated by the latest round of reciprocal tariffs.

Last week, Trump unveiled global reciprocal tariffs, under which the US would levy a 34 percent tax on imports from China, a 20 percent tax on imports from the European Union, 25 percent on South Korea, 26 percent on India, 24 percent on Japan and 32 percent on Taiwan.