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Informist, Wednesday, May 6, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates slumped Wednesday, tracking a fall in crude oil prices after Axios reported that the US and Iran were closer than ever in agreeing to a deal to end the war in West Asia, going on since the end of February. Fears of domestic rate hikes ebbed as crude prices fell because a peace deal soon may keep the war's impact on India's inflation limited to the first half of the financial year started April, dealers said. 

 

The one-year swap rate fell to 5.90% Wednesday from 6.06% the previous day. The five-year swap rate ended at 6.50%, sharply lower than 6.67% Tuesday. The benchmark contracts fell by 16 and 18 basis points, respectively. This was the biggest one-day fall for each since Apr. 8, following the agreement of a ceasefire between the US and Iran.

 

Brent crude for July delivery tumbled nearly 10% during Indian market hours, to $98.10 a barrel at 1700 IST. The contract fell to its lowest in two weeks after Axios reported, citing US officials, that the White House believed the two sides were close to an agreement and had sent a one-page memorandum of understanding to Iran, expecting a response in 48 hours.

 

The total notional trading volume of deals reported on Clearing Corp. of India Ltd.'s derivatives trading platform surged to INR 957.95 billion from INR 560.30 billion Tuesday. Volumes rose sharply as traders reacted to the news and unwound their paid fixed rate bets, though some traders also booked profits on their received positions by the end of the day, dealers said.

 

"The stress built up around the war is why swaps are so high, rather than any fundamental trigger on domestic inflation," a dealer at a primary dealership said. "There was a lot of receiving built up above 6.50%, which is why there was some unwinding towards the end of the day." 

 

Volumes in swaps maturing in up to three months surged as rate expectations over the next two policy meetings changed due to the report, dealers said. Swap rates up to three months covered the Monetary Policy Committee's rate decisions in June and August. The three-month swap rate still showed a high chance of at least one rate hike of 25 basis points from the current 5.25% in the next two policy decisions, dealers said.

 

"There was heavy unwinding today from both onshore and offshore traders," a dealer at a private sector bank said. "The five-year had the most reaction since it was tracking crude, but the one-month trade is crucial. The market is largely reflecting a rate hike in June and if the conflict ends quickly, maybe people will reconsider."

 

In the one-year swap rate, traders cut out an entire 25-bp rate hike in the next 12 months through Wednesday. Until Tuesday, the one-year swap rate was pricing in nearly five rate hikes to a repo rate of 6.50% by April, dealers said. The persistence of Brent crude futures below $100 a barrel will eventually move rate-hike pricing to under 75 bps. While most traders expect only around 50 bps of rate hikes by the MPC in FY27, swap rates have remained high due to banks and mutual funds hedging their bond holdings by paying swap rates, dealers said. 

 

A sharp rise in the rupee against the dollar also pulled down OIS rates, dealers said. The rupee recorded its biggest daily gain in almost five weeks because of the fall in crude oil prices. Traders fear the Reserve Bank of India will tighten monetary policy to attract foreign portfolio investors and curb the rupee's fall, dealers said. The domestic unit had ended at a record closing low of 95.28 a dollar Tuesday. It rose to 94.61 a dollar at Wednesday's close as concerns about the war eased. 

 

OUTLOOK

OIS traders will track crude oil prices and developments in the war in West Asia on Thursday, dealers said. After falling below $100 a barrel for the first time in two weeks, Brent crude futures climbed past that crucial level after Indian market hours on US President Donald Trump's comment about bombing Iran if a deal was not reached. Reports that Tehran had made a website to administer the Strait of Hormuz also resulted in oil prices rising.

On the domestic front, traders are worried that the Centre might hike petrol and diesel prices to support oil marketing companies, which are losing money on retail sales after crude prices jumped because of the West Asia conflict. RBI's Monetary Policy Committee external member Ram Singh also said Tuesday that the government should hike retail fuel prices. If pump prices go up, CPI inflation could climb towards the top of the RBI's 2-6% tolerance band later in 2026-27 (Apr-Mar), dealers said. Swap rates have already factored in multiple repo rate hikes in India in 2026-27 (Apr-Mar) and beyond.

 

The movement in US Treasury yields, the rupee, and overnight money market rates may lend cues to swaps. On Thursday, the one-year swap rate is seen at 5.75-6.15% and the five-year swap at 6.35-6.73%.

 

	At 1700 IST	TUESDAY
1-year OIS	5.90%	6.06%
2-year OIS	6.10%	6.28%
5-year OIS	6.50%	6.67%
2-year MIFOR	6.67%	6.85%
5-year MIFOR	7.04%	7.19%

 

End

 

US$1 = INR 94.61

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

 

Edited by Avishek Dutta

 

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