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Informist, Monday, Mar. 23, 2026

By Janwee Prajapati and Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended off intraday highs Monday after US President Donald Trump halted strikes on Iran's energy infrastructure for five days citing fruitful negotiations to end the war with Tehran, dealers said. Following Trump's comment on social media at 1635 IST, Brent crude oil prices and the 10-year US Treasury yield slumped and pulled down OIS rates as well. Regardless, swap rates ended sharply higher as traders feared rate hikes from the Reserve Bank of India's Monetary Policy Committee in 2026-27 (Apr-Mar) and wanted to hedge their underlying bond holdings, dealers said. 

The one-year swap rate ended at 5.97%, up from 5.88% Friday. The one-year OIS rates rose sharply as traders priced in at least three repo rate hikes with the first hike expected in June, dealers said. Traders expect the MPC to raise policy rates based on a surge in inflation due to the rise in oil prices, they said. Brent crude futures for May delivery were above $110 a barrel through most of Indian market hours, before plunging to under $100 a barrel after Trump's comment. 

At the day's high of 6.07%, the one-year OIS rose nearly 20 basis points Monday and was less than 30 bps lower than what it was almost a year ago, in the middle of the MPC's rate cut cycle, which has since reduced the policy repo rate by 100 bps further. At the day's high, the market was pricing in the overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – to rise to 6.25% by December, indicating 100 bps of rate hikes across the five remaining policy decisions this year. 

"Agreed that the short-end (one-year OIS and lower) has four to five hikes priced in and that may look like very excessive, but we are also in very, very critical times in terms of the overall India macro-economics," a market participant said. "So that just might remain and whatever interest for receiving was there earlier, now it is reaching to a point where people are actually panicking. Now the discussions about rate hikes somewhere in the next two to three months, that doesn't look as unrealistic as it was." 

Till last week, swaps were overpricing rate hike expectations as offshore players, including large hedge funds, exited their received bets. However, while swaps are still overpricing rate hikes, traders' views on rate hikes drastically changed over the weekend after the West Asia war escalated further instead of showing signs of easing as it entered its fourth week, dealers said. With rates rising, private-sector banks hit stop-losses on their received positions in swaps, while mutual funds were paying fixed rates to reduce the interest-rate risk on their holdings of state government bonds, bought at attractive yields.

"Everywhere everyone is paying," a dealer at a primary dealership said. "I think OIS overreacted to the triggers...some traders hit stop losses also, which also pushed the rates (up)."

The five-year OIS rate ended at 6.52%, up 11 basis points from Friday. The day's high on the five-year swap was 6.64%, up 23 basis points from Friday's close, marking the largest intraday rise since the off-cycle rate hike on May 4, 2022. The total notional trading volume of deals reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 546.35 billion, down from INR 696.20 billion Friday. 

Till last week, domestic dealers found the rise in swaps lucrative to receive, especially since the spread between the five-year Indian government bond yield and the five-year OIS was inverted, with the non-funded instrument offering a higher return, dealers said. That view has changed as traders finally price in the likelihood of a prolonged oil crisis due to the war in West Asia, they said. Near-month Brent crude oil futures have risen nearly 60% since the onset of the war. 

Dealers expect the MPC to hike rates in the second half of 2026, with several expecting the first hike of 25 bps in June, if Brent crude oil prices sustain above $100 per barrel. Prior to the outbreak of the war, market players were expecting a rate hike in late 2027 or in early 2028. At the day's highs, the one- and five-year OIS rates had risen around 60 bps since the war in West Asia began on Feb. 28.

The rupee also hit a record low of 93.9800 a dollar in the last leg of trade and settled at 93.9750, down 0.3% from Friday's close of 93.7100. However, the rupee fell past the psychologically crucial 94-per-dollar mark to 94.11 in off-hours trading after the spot market closed at 1530 IST. Several traders and economists expect the RBI to tighten monetary policy in order to defend the domestic unit against a further fall, especially with the possibility of US Federal Open Market Committee raising interest rates in 2026, according to CME FedWatch tool. 

The surge in OIS rates eased after the US Treasury yields softened, with the yield on the US 10-year note slipping to 4.31% towards the end of Indian market hours, down from 4.44% at 1630 IST. Several traders covered their intraday paid fixed rate positions after Trump's comments suggested a thaw in the war, though OIS rates didn't erase their rise completely as traders were wary of developments in the conflict overnight, dealers said.

"If Trump is saying all this, it looks like the US at least wants to back off from further fighting with Iran," a dealer at a foreign bank said. "That in itself is a big positive for the market, which has gone haywire today. Let us see what tomorrow brings."

OUTLOOK

Tuesday, swap rates will likely open lower if there is no escalation in West Asian war overnight, following a halt in planned US strikes in Iran, dealers said. Swap rates will also track Brent crude oil prices for May delivery as the war in West Asia is set to enter its fourth week. Traders will also track the movement of US Treasury yields. Significant movement in the rupee may also lend direction, dealers said.

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. However, on the technical front, 6.50% is seen as a lucrative level to receive, which could thereby limit a further rise. 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.

The one-year swap rate is seen at 5.62-6.10% and the five-year at 6.30-6.65% on Tuesday.

End

US$1 = INR 93.98

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

Edited by Deepshikha Bhardwaj

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