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Informist, Tuesday, Mar. 17, 2026

By Janwee Prajapati and Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended lower Tuesday, tracking an intraday fall in US Treasury yields as domestic banks' asset and liability management desks received fixed rates at levels seen to be attractive after ending at multi-year highs Monday, dealers said.

The one-year swap rate ended at 5.80%, down from 5.84% Monday. The five-year OIS rate ended at 6.38%, down from 6.43% the previous session. The total notional trading volume of deals reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 332.05 billion, against INR 428.50 billion Monday. The yield on the benchmark 10-year US Treasury note was 4.22% at 1700 IST, down from 4.25% at the same time Monday.

The absence of a large offshore player limited a rise in swap rates even as crude oil prices stayed above $100 per barrel, dealers said. Offshore hedge funds have been paying fixed rates in swaps since the military conflict in West Asia began, which had pushed up swaps to multi-year highs. A few offshore traders think the five-year swap rate will hit the 7.00% level on a sustained rise in Brent crude oil prices in the medium term if the war does not end soon, dealers said. Offshore traders refrained from aggressive trades ahead of the US Federal Open Market Committee's rate decision at 2330 IST Wednesday. While inflation is seen rising because of the conflict, risks to economic growth and a weak jobs market in the US pulled the 10-year US yield down. While a status quo on rates is expected Wednesday, commentary and the outlook on growth and inflation will be in focus, dealers said.

However, domestic traders found current rates lucrative to receive fixed rate contracts, since swaps were pricing in a rate hike cycle in India, dealers said. Most onshore players were on the receiving side in swaps, they said. The one-year OIS rate is pricing in at least two rate hikes of 25 basis points each in the next 12 months. The five-year OIS is seen falling to 6.20% before rising again, dealers said. Private-sector banks' asset and liability management desks have been receiving fixed rates, dealers said. However, trade volumes were thin Tuesday, indicating not much activity from onshore players either.

"Foreign players have a paying bias, they could be shorting or hedging here with some other country," a trader at a primary dealership said. "6.20-6.25% is a good paying zone but only depends on the war now."

Intraday, swaps recovered briefly from the fall as Brent crude oil futures for May delivery shot up to nearly $105 per barrel. However, towards the end of Indian market hours, US Treasury yields fell, because of which swap rates also fell, dealers said. 

"Everyone onshore is receiving only, there was a brief surge in crude because of some news of Iran attacking some place, so we saw some recovery, but if foreign traders are not there swaps will go downward," a dealer at a private-sector bank said.

OUTLOOK

Wednesday, swap rates will track Brent crude oil prices for May delivery as the conflict in West Asia continues. Traders will also track US Treasury yields ahead of the US FOMC decision later in the day. They expect the FOMC to maintain status quo on rates. Swaps may also track overnight borrowing rates and any announcement of measures to infuse liquidity in the banking system by the Reserve Bank of India, dealers said. Even after the RBI conducted an INR-1.50-trillion variable rate repo auction Tuesday, the overnight Mumbai Interbank Outright Rate was set above the repo rate at 5.32%.

Depending on the movement of Brent crude oil prices, the five-year swap rate could rise to 6.55-6.62% if offshore funds continue to pay fixed rates, dealers said. While the spread between gilts and swaps is lucrative to receive fixed rates, any stop-losses hit may result in unwinding of these spread trades, dealers said. In the longer run, the inverted spread is expected to correct, especially as bond yields are seen rising with fresh supply coming in April. If crude oil futures fall back to around $80 a barrel, the five-year swap could ease to as low as 6.20% 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 the RBI's Monetary Policy Committee members on further rate action. Moreover, short-term swap rates will track the movement of overnight borrowing rates amid heavy outflows, dealers said. The RBI is seen providing ample liquidity to the banking system for transmission of its monetary policy after 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 5.62-6.00% and the five-year at 6.15-6.62%.

End

US$1 = INR 92.37

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

Edited by Rajeev Pai

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