Broadening inflation, Fed prompts traders to ramp up October India rate hike bets

Business Recorder reported that traders are increasingly wagering on a Reserve Bank of India rate hike in October, citing rising oil prices and wider inflation as reasons for tighter monetary policy. The one-year overnight index swap rate climbed 8 basis points on Tuesday to 6.11 per cent, its loftiest level since early June, while the five-year rate gained 11 basis points to 6.68 per cent. The one-month contract, which gives a clearer read on October expectations, moved up 10 basis points to 5.34 per cent.

Four traders, who asked not to be named, said an October move was almost certain, and some economists have moved their forecasts forward to the 7 October meeting. Citi now treats an October hike as its base case, citing core inflation momentum that has strengthened sharply, with August's reading more than double its two-year average. Deutsche Bank also brought its call forward from December, pointing to headline inflation nearing 5 per cent and a broadening of core inflation.

Oil is a central concern, with Brent crude up more than 18 per cent over two weeks and near $110 a barrel on Monday. The RBI has not yet raised rates, unlike several oil-sensitive Asian economies that have already tightened policy, and the US Federal Reserve is expected to lift rates on Wednesday with markets pricing in a probability above 90 per cent. Deutsche Bank added that interest-rate differentials are becoming more important for sustaining capital inflows.