New Delhi, April 7 -- Markets are signalling a sharp divergence from the Reserve Bank of India's (RBI's) expected policy pause on 8 April, with traders in the Overnight Index Swap (OIS) market pricing in an aggressive rate-hiking cycle over the coming months.

That divergence is feeding into the real economy. Surging crude oil prices and the war in West Asia have pushed up borrowing costs across the economy as lenders and investors factor in higher future interest rates.

The OIS market, where traders position for future interest rates, reflects expectations of the RBI's policy path. A rise in the one-year OIS signals expectations of higher rates over the next year.

In practice, banks and bond markets use these expectations to price loan...