Standard Chartered Global Research expects India\u2019s Monetary Policy Committee to raise the repo rate by 25bps to 5.50% at its 7 October decision, with a further 25bps increase pencilled in for December. The note also sets out an alternative path beyond its baseline of 50bps of tightening by December, flagging a potential extra 25\u201350bps of hikes if inflation proves more persistent than anticipated.<\/p>\n\n
On prices, it forecasts September CPI inflation at 5.7% year on year, before moving above 6% by the December MPC meeting. It reiterates the inflation framework of a 2\u20136% band around a 4% medium-term target, and points to policy communications that align with a return towards normalisation, including an expectation that average inflation rises towards 5% in FY27 from 2.5% in FY26.<\/p>\n\n
We recommend that derivative traders immediately position for a hawkish pivot by shorting Indian Government Bond futures ahead of the October 7 policy announcement. With the repo rate expected to rise by 25 basis points to 5.50% next month and another 25 basis points in December, short-term yields are poised to climb. Traders can capture this upward shift by paying the fixed rate in the 1-year Overnight Index Swaps market.<\/p>\n\n
This tightening cycle is heavily backed by strong macroeconomic fundamentals, with India\u2019s GDP growth tracking comfortably above 6.5% this year. Meanwhile, domestic consumer inflation is creeping upward, mirroring the historical 2022 cycle when a spike in prices forced the central bank to hike rates by 250 basis points. To hedge against these pressures, buying out-of-the-money put options on benchmark debt is highly recommended.<\/p>\n\n
If inflation breaches the 6% threshold by December, we anticipate the policy rate could scale even higher in early 2027 to prevent the central bank from falling behind the curve. Historically, such aggressive front-loading leads to a rapid flattening of the yield curve. We suggest traders initiate curve-flattening positions, going long on long-term bonds while shorting short-term interest rate futures.<\/p>\n\n\n\n