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Informist, Tuesday, Apr. 7, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates closed off lows hit during the day as Brent crude futures for June delivery topped $110 a barrel 1700 IST, after falling to as low as $107.42 a barrel intraday. Both the one- and five-year swap rates ended lower for the second straight day as traders pared bets on a rate hike by the Reserve Bank of India's Monetary Policy Committee Wednesday, dealers said.

The one-year swap rate ended at 6.15%, down from 6.18% Monday but up from 6.09% intraday. The five-year OIS rate hit a low of 6.61% intraday and ended at 6.66%, down from 6.70% in the previous session. The total notional trading volume of deals reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 791.05 billion, sharply up from INR 546.15 billion Thursday.

Traders spent most of the day positioning before the policy decision. Mutual funds were unwinding their paid fixed rate bets as the market's fears of rate hikes in April were seen as overdone, dealers said. Swaps of up to two years were still pricing in nearly 100 basis points of repo rate hikes from the current 5.25% in 2026-27 (Apr-Mar), which was not a widespread market view as traders expect the war in West Asia to subside within the next month. In such a scenario, CPI inflation for FY27 is estimated at less than 5% by market participants, below the 6% upper limit of the RBI's tolerance band.

Moreover, a rate defence of the domestic currency is not warranted after the rupee has risen nearly 2.5% from its record low over the past few sessions, dealers said. The RBI has curbed speculative positioning in the rupee through two sets of directions since Mar. 27, effectively leading to a surge in the currency.

Traders were keenly looking forward to RBI Governor Sanjay Malhotra's comments on growth and inflation. On this, traders were divided – some dealers hoped for a neutral commentary acknowledging risks to both growth and inflation from the war in West Asia, while others expected a "hawkish" commentary focusing on keeping inflation in check. A minority expected the governor and Monetary Policy Committee to be "dovish", underlining the risks to India's GDP growth while terming the rise in crude oil prices as a one-time supply shock that may not have second order effects. India's crude oil basket averaged $113.67 a barrel in March as cargoes through the Strait of Hormuz, which usually supplied about half of India's oil needs, came to a virtual standstill.

"I think people have gone back to their senses on what to expect from the RBI, which has shown no signs of panic so far in terms of pulling out liquidity or tightening rates", a dealer at a private-sector bank said. "OIS rates will benefit more from this than bonds as they have already priced in quite a bit of rate hike, which in the best case should be unwound sharply tomorrow."

Traders also received fixed rates as the Brent crude futures fell from the day's high, but reports of fresh escalation in the West Asia war pulled back swap rates and crude oil prices from lows. Some traders also booked profit on their received fixed rate positions after the sharp fall in OIS rates over the past two days.

The one-month swap rate still reflected around a 50% chance of a rate hike. Volumes in contracts up to three months surged as traders recalibrated their expectations on the rate decisions in both the April and June monetary policy outcomes, dealers said. At least one 25-bps rate hike is priced in by June.

"Mutual funds were in an unwinding mood today (Tuesday) but then sentiment on the war shifted again, so we couldn't close with as much of a fall as maybe one should expect," a dealer at a primary dealership said.

OUTLOOK

Swap rates may open steady Wednesday before the Monetary Policy Committee's rate decision is announced, dealers said. Overnight developments from the war in West Asia may have an impact early, but traders await RBI Governor Malhotra's commentary on the conflict in his policy statement at 1000 IST.

A status quo on the repo rate at 5.25% is likely to pull down the one-year OIS rate below 6%. If the policy stance remains at "neutral", the contract may fall to around 5.90%. However, the fall may be limited if the six-member committee is divided on the votes and some members vote for a rate hike or a "withdrawal of accommodation" stance, dealers said.

A rate hike will likely send short-term swap rates higher as it will cement the market's fear on sharp monetary policy tightening in India in response to higher crude oil prices due to the West Asia war, dealers said. Traders do not expect a rate cut as CPI inflation is seen on the rise in FY27 even if the war concludes shortly.

Meanwhile, comments from Malhotra, other RBI officials and the MPC on the trajectory of growth and inflation will be keenly watched for cues on the direction of rates. Traders are divided on what to expect, with scenarios being built on a "neutral", "hawkish", or "dovish" tones.

Currently, swap rates are pricing in a "hawkish" tone, focusing on keeping inflation in check, without a rate hike, dealers said. A growth-supportive policy tone may send swap rates tumbling even further and trigger stop-losses on paid fixed rate bets in both the one- and five-year swap rate. The one-year swap rate could fall to as low as 5.70% and the five-year swap rate to 6.30%.

The movement in crude oil prices and US Treasury yields may also lend cues at the open. After Indian markets were shut, US President Donald Trump said on social media that "A whole civilization will die tonight, never to be brought back again", referring to Iran. He has set a deadline of 0530 IST Wednesday for Iran to agree to open the Strait of Hormuz before bombing its bridges and power facilities, a war crime under international law.

The one-year swap rate is seen at 5.70-6.40% and the five-year at 6.30-7.00% Wednesday.

End

US$1 = INR 93.01

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

Edited by Deepshikha Bhardwaj

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