As lead indicators go, the overnight indexed swap* (OIS) is a handy one. And market mavens seem to have acquitted themselves with their rate calls of late. But more on that later.

Cut to now, and what does the ‘bull-flattening’ of the OIS curve since mid-June indicate?

It shows the market is betting the Reserve Bank of India (RBI) could cut rates faster than expected once it is done with the rate hikes.

While that may seem a stretch at present given the many moving parts, it’s worth noting that the ascent of the OIS rates since the beginning of this year was prescient. It showed traders expected the RBI to hike the repo rate faster than communicated.

A bull-flattening of the curve leads to long-term rates falling faster. On the other hand, a bear-flattening underlines expectations of further tightening, which causes short-term rates to rise faster than long-term ones. Either way, there is convergence of the short- and long-term rates.

Since the beginning of March — in the lead-up to the off-cycle Monetary Policy Committee (MPC) meet in May — the 1-year OIS rate had jumped ~70 basis points (bps), while the 5-year onshore OIS rate rose ~86 bps.

Then on May 4, the MPC hiked the repo rate by 40 bps to 4.40%.

While this was dubbed a ‘surprise move’, the OIS market was, well, ahead of the curve.

Thereafter, too, and through June, OIS rates have stayed elevated, indicating the market is factoring in more, and quicker, repo rate hikes.

On cue, June saw another 50 bps hike in the repo rate to 4.90%. So what gives?

*OIS is an interest rate derivative contract in which two entities (say, banks) agree to swap/exchange a fixed interest rate payment versus a floating interest rate payment on a notional principal amount during the tenure of the contract. The interest rate swap is one of the main interest rate derivative products traded in India, as is the forward rate agreement (FRA)