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Informist, Wednesday, Mar. 11, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher Wednesday due to an intraday rise in crude oil prices. A large quantum of paid fixed rate bets from offshore traders triggered some stop-losses for those who had received fixed rates Tuesday, making the five-year OIS rate rise sharply, dealers said. 

The one-year swap rate ended at 5.74%, up from 5.72% Tuesday. The five-year OIS rate ended at 6.35%, up from 6.28% the previous session. Both contracts had zoomed on Monday to multi-year highs before falling the most in 15 months on Tuesday. The total notional trading volume of deals reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 714.10 billion, higher than INR 594.25 billion Tuesday.

Brent crude for May delivery was $90.31 a barrel at 1700 IST, hitting a low of $86.24 and high of $92.98 during Indian market hours, against $91.18 a barrel at 1700 IST Tuesday. Swap rates edged lower near the open, tracking an overnight fall in crude prices, which rose during the day due to the influx of headlines on the armed conflict in West Asia. The dip near the close of Indian market hours was likely triggered by reports that several nations, including Japan and Austria, supported the International Energy Agency's plan to release a record amount of oil from its strategic reserves into the market. Bloomberg reported that the agency had proposed a drawdown of 300 million-400 million barrels.

Still, offshore traders heavily paid fixed rates as the conflict in West Asia showed no signs of abating. Traders said large hedge funds paid the five-year OIS contract under 6.30%, pushing up rates during the day when crude prices also began rising, dealers said. Eventually, this triggered stop-losses for some domestic traders around 6.34-6.35% on the five-year rate, they said. S&P Global Ratings and Nomura Wednesday said India was among the most vulnerable nations to a disruption in crude oil supply from the Strait of Hormuz, which Iran has effectively blocked after the US and Israel attacked it on Feb. 28.

"It is unavoidable to have rates rise when offshore traders are hitting the market with large quantums," a dealer at a foreign bank said. "Hedge funds have been active on both sides but paid (fixed rates) again today (Wednesday). I don't think it has anything to with crude but is likely to do with how their models are playing out on India."

Though the rise in Brent crude prices to $90 a barrel or more is expected to fuel domestic inflation, traders said the bigger medium-term risk was to the economy. Over the past few days, the government has directed oil marketing companies to cut supply of liquidified petroleum gas to commercial and non-domestic establishments as nearly 40% of India's LPG supply comes through the blocked Strait of Hormuz. This is threatening both the manufacturing industry and hurting service establishments such as hotels and restaurants, which will have a cascading effect on lowering economic growth, dealers said.

Moreover, the RBI has announced open market purchases of government bonds worth INR 1 trillion through two auctions this week. The central bank is also speculated to be buying gilts in the secondary market. The massive liquidity infusion is seen as a sign of continued RBI accommodation during the external headwinds, which will also keep the overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – in check. The benchmark MIBOR rate has not been set at or above the RBI's repo rate of 5.25% since Feb. 2.

"It seems to me a mini-COVID like situation, where the RBI is hell-bent on infusing liquidity as there is a big economic risk from the use of LPG being cut down," a dealer at a primary dealership said. "Fundamentally, you can't go wrong with receiving (OIS rates) at these levels since it is more likely we are looking at a cut than a hike (in the repo rate)." The base case in the market is that the RBI's Monetary Policy Committee will stand pat on rates in 2026-27 (Apr-Mar), though the one-year OIS rate is reflecting at least a 25-basis-point hike.

With OIS rates trending upwards and the view on rates being lower gaining steam, some banks have begun entering reverse bond-swap trades, dealers said. This entails selling or short-selling gilts while receiving the five-year swap rate. However, while the trade makes logical sense, its stop-losses are constantly being triggered due to the RBI buying bonds and offshore flows pushing up swap rates, dealers said.

OUTLOOK

As has been the trend through March, traders will focus on offshore developments to determine the movement of OIS rates, especially the movement of crude oil prices and US Treasury yields. Developments in the West Asia conflict will be tracked. Oil prices are seen volatile in the near term as conflicting statements from various political and defence personnel leave uncertainty about when the war in West Asia will end. 

The five-year swap could rise to 6.55-6.62% if Brent crude oil once again rises to $120 per barrel and upwards. If crude oil futures fall back to around $80 a barrel, the five-year swap could ease to as low as 6.15% as stop-losses will be triggered on paid fixed-rate bets, dealers said. Swap rates maturing in up to one year may also be volatile as traders bet on whether higher inflation or lower growth will tip the votes of MPC members on further rate action. 

Indian government bond yields are seen largely cushioned from the impact of the West Asia conflict due to purchases by the RBI, both on-screen and via auction, dealers said. On the domestic front, the RBI is seen providing ample liquidity to the banking system for transmission of easy monetary policy after the 125 bps of rate cuts in 2025. Significant movement in the rupee may also lend direction, dealers said. The one-year swap rate is seen at 5.62-5.90% and the five-year at 6.15-6.55%.

End

US$1 = INR 92.04

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Avishek Dutta

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