(Bloomberg) -- Some traders in India’s bond market are betting that the central bank may have actually reached the peak of its rate hikes, even as the monetary authority sounded hawkish in its policy.

The yield on 10-year bonds rose only three basis points on Wednesday after the Reserve Bank of India kept the door open for further policy tightening, reflecting the market’s outlook on rates. Swaps indicate the RBI may start cutting rates in the first quarter of next year, according to PGIM India Asset Management Pvt. 

The central bank’s hawkish bent came amid global turmoil in bonds after a red hot US jobs report spurred expectations of further hikes by the Federal Reserve. Against that backdrop, any hint of a dovish pivot may have piled more pressure on the beleaguered rupee, already near a record low amid foreign stock outflows exacerbated by a rout in Adani Group shares.

“Even with whatever the RBI has said, markets are still pretty convinced that this was the last hike,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership Ltd. “Amid all the recalibration around US rates, it would’ve been very difficult for RBI to go ahead and make that call that let’s go ahead and pause.”

Five-year swap rates climbed only 10 basis points on Wednesday to 6.33%, below the RBI’s benchmark repurchase rate of 6.5%, according to data compiled by Bloomberg. “Five-year OIS is firmly below policy rate, so is pricing a rate cut,” said Puneet Pal, head of fixed income at PGIM India Asset Management Pvt. 

India’s economic growth will undershoot the RBI’s forecast of 6.4% in the next fiscal year and that will cool down core inflation over the year ahead, according to Suyash Choudhary, head of IDFC Asset Management Co. 

“While initially disappointing for the bond market, the policy does nothing to change our view that policy rate has peaked in India,” he said.

Still, not everyone is as dovish. Expectations for growth and inflation, and cautious commentary from policy makers point to another rate hike in April, which could drive another uptick in yields, according to Citigroup Inc. economists including Samiran Chakraborty.

“We cannot rule out further hike at this stage, especially if the growth-inflation profile moves in line with the RBI forecast, making the terminal rate prediction difficult,” they wrote in a note. “The hurdle for a rate cut in 2023 has increased substantially.”

PGIM’s Pal points to signals from India’s yield curve. While the yield on the 10-year bond rose three basis points, that on the five-year note surged by seven basis points to 7.24%. The 10-year yield was steady at 7.35% on Thursday, while rose three basis points for the five-year security. 

“The curve has flattened a bit, the markets were slightly disappointed with no change in the stance,” he said. “Obviously when you think RBI will stand pat on rates for a longish timeframe you get a flatter curve as we are seeing.”

(Update with Thursday’s yield levels in the 10th paragraph)

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