NEW DELHI: After being lulled into complacency as recently as February that India’s central bank will not tighten policy anytime soon, investors have swung the other way and are factoring in sharp increases by the monetary authority that is grappling with surging inflation much like its counterparts globally.

       Nomura Holdings Inc expects the central bank to raise its benchmark repo rate to 5.75% by end-December from 5% earlier. Barclays Plc said the central bank’s aggressive tightening on Wednesday has fueled expectations of a 75-point increase in the June policy.

       The Reserve Bank of India (RBI) stunned the markets Wednesday with its 40 basis point rate increase and a move to suck out billions from the banking system.

       That was a remarkable U-turn from February when it announced an ultra-dovish policy, highlighting a relaxed stance towards inflationary pressures at home and United States tightening abroad.

       “The markets, mollycoddled by previous comments and supporting the RBI’s earlier stance, will feel cheated,” said Arvind Chari, chief investment officer at Quant Advisors Pvt in Mumbai.

       “The ‘shock and awe’ was visible with bond yields rising sharply, especially at the shorter end of the curve.”

       Yields on the benchmark 10-year bond jumped as much as 30 basis points on Wednesday to 7.42%, the highest since 2019, while the shorter four-year yield saw a nearly 50 basis point jump. Yields extended gains yesterday.

       To the central bank’s credit, it did make a hawkish pivot in April that saw economists and swap markets factor in a rate hike in June – when the monetary policy committee is due to meet next.

       That view was based on the assurance from governor Shaktikanta Das that any move will be calibrated and well telegraphed as he switched his focus to inflation from growth.

       The sudden RBI hikes has shaken markets. That was visible in the pricing: the two-year swap jumped 53 basis points on Wednesday to 6.41%, its highest level since 2019, while the five-year swaps rose 38 basis points.

       The sharp repricing in swaps now reflects the overnight rate moving 110-115 basis points higher over a five-week period until the next June 8 decision, instead of an eight-month transition over four meetings earlier, according to Barclays Bank Plc.

       Later Wednesday, the US Federal Reserve raised its key rate by 50 basis points as expected, but provided some relief to emerging markets as it talked down the possibility of super-sized hikes.

       Back home, the key takeaway for most investors was the RBI acknowledging inflation risks rather belatedly and that it was well behind the curve and market pricing when it came to policy normalisation.

       “While the normalisation process now undertaken by RBI is fully understandable what is somewhat more perplexing is its somewhat of a disregard to the forward pricing mechanism of the market,” said Suyash Choudhary, head of fixed-income at IDFC Asset Management Co.

       “So unless the RBI addressed this, investors will be uncertain about where the repo rate will end in this tightening cycle,” he added. — Bloomberg