RBI monetary policy: Four charts show markets are preparing for a rate hike

The interest-rate cycle in India is turning. The central bank may be set to tighten policy next week to keep inflation in check and stem the declines in the rupee if the rate-market moves are any indication.

The Reserve Bank of India hasn’t tinkered with rates since August, and even cut inflation projections last month, raising expectations that borrowing costs would remain on hold. But a surprising hawkish tilt revealed in its April policy minutes and the recent spike in oil has boosted speculation the authority may lift rates at its June 6 meeting.

“Front-end bonds are fully pricing in a 25-basis point hike in June,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. in Mumbai. “Even accounting for some higher supply absorption premium, one can say that a 75-basis point increase seems to be comfortably discounted over the next year.”