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Informist, Wednesday, May 20, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended lower, tracking an intraday fall in crude oil prices and US Treasury yields after opening higher. Continued hedging activity from issuers of fixed-rate bonds and investors in floating-rate bonds also pulled down swap rates maturing in two to five years, dealers said.

 

The one-year swap rate ended at 6.21% Wednesday from 6.27% the previous day, down 10 basis points over the last two sessions. The five-year OIS rate closed at 6.80%, down from 6.85% Tuesday. The one-year swap rate hit an intraday high of 6.30% and the five-year 6.90% in early trade. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 791.55 billion Wednesday from INR 639.15 billion the previous session.

 

The 10-year US Treasury yield hit a 16-month high overnight to 4.67% at 0900 IST Wednesday, up from 4.62% at the end of Indian market hours Tuesday. The expectation of rising inflation caused by the war in West Asia has led to US yields, reversing completely from expectations of further rate cuts. Meanwhile, Brent crude for July delivery was above the psychologically crucial $110 a barrel mark for the third day at the start of the session. Offshore traders paid fixed rates in early trade as both factors made the case for the Reserve Bank of India to move more quickly to tighten monetary policy, dealers said.

 

By 1700 IST, Brent crude for July had cooled to $108.75 a barrel after dipping below the $108 per barrel mark intraday on reports that a South Korean oil tanker had transited the Strait of Hormuz and that Japan had found alternative sources to West Asia to meet fuel demand. The 10-year US yield also eased slightly below 4.65%, weakening the case to pay fixed rates, dealers said. 

 

"There was again some offshore activity that came through in the morning, but it was not very significant," a dealer at a primary dealership said. "The domestic side has been receiving quite heavily anyway and once crude came down, that started reflecting in OIS (rates) as well."

 

Mutual funds continued to receive fixed rates while investing in floating rate corporate bonds to maximise returns, dealers said. M&M Financial Services Ltd. raised INR 30 billion through floating rate bonds on Monday, with more such instruments in the pipeline this week. The planned issuances in Apr-May match the amount raised by corporates through floating-rate bonds for the entirety of FY26, according to a calculation by Informist. This reflected changing investor preferences as fears of rate hikes crystallised, dealers said.

 

Meanwhile, traders who had paid fixed rates around 6.60% on five-year swaps took profits above 6.80%, dealers said. OIS rates on instruments maturing under one year were also seen as lucrative to receive, as they rose sharply this week to fully price in repo rate hikes starting in August, dealers said. Some traders were still of the view that the RBI's Monetary Policy Committee would not raise rates till Oct-Dec after the impact of the El Nio phenomenon on India's monsoon was clearer, dealers said.

 

Swap rates currently reflect an expectation of 125 basis points of repo rate hikes from the current 5.25%, reversing the entire rate-cutting cycle conducted between February and December 2025. Dealers were sanguine that India's rate-setting panel would not be aggressive in hiking rates unless crude oil prices rise further, based on recent comments by RBI Governor Sanjay Malhotra and external member Ram Singh. However, some traders expect geopolitical conditions to continue to drive OIS rates higher.

 

"We see this as a sort of retracement as the market gets used to these levels, with some profit taking also on paid positions," a dealer at a private-sector bank said. "Since the war situation is still going on, we feel there is a case to be made for more paying (of fixed rates)."

 

OUTLOOK

On Thursday, swap rates are seen opening steady after the recent volatility. The RBI's announcement to inject rupee liquidity by conducting a three-year, $5 billion dollar-rupee buy-sell swap auction may keep short-term OIS rates in check, dealers said. The overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – is expected to remain within the 5.15-5.30?nd until the MPC's next rate decision on Jun. 5.

 

Though most traders do not expect the US to attack Iran despite threats from President Donald Trump, the lack of a peace deal and a fragile ceasefire will continue to keep the market on edge, dealers said. OIS rates will be sensitive to further developments in the war and their impact on crude oil prices, they said. 

 

For India, the continued blockade of the Strait of Hormuz and Brent futures above $100 a barrel made the case for the MPC to hike repo rates as spillovers would begin to get reflected in retail inflation, dealers said. With two price hikes in petrol and diesel since Friday and more expected, CPI inflation could climb towards the top end of the RBI's 2-6% tolerance band later in FY27, they said. Swap rates are currently pricing in nearly 125 bps of repo rate increases over the next 12 months. 

 

Traders also await the transfer of the RBI's surplus for FY26 to the Centre, likely to be announced Friday. Traders expect a transfer of INR 2.7 trillion to INR 3.5 trillion, with some expecting a cut in the RBI's contingency risk buffer to 6.5%. Without a higher-than-budgeted transfer of surplus from the RBI, the government is looking at a gaping hole of nearly INR 5 trillion in its finances, an analysis by Informist showed. A disappointing transfer is likely to cause a sharp fall in gilt prices, prompting traders to hedge their portfolios by paying swap rates, dealers said.

 

The movement in US Treasury yields, the rupee, and overnight money market rates will also affect swaps. Thursday, the one-year swap rate is seen at 6.12-6.40% and the five-year at 6.60-7.00%.

 

	At 1700 IST	MONDAY
1-year OIS	6.21%	6.27%
2-year OIS	6.47%	6.52%
5-year OIS	6.80%	6.85%
2-year MIFOR	7.21%	7.22%
5-year MIFOR	7.52%	7.52%

 

End

 

US$1 = INR 96.82

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

 

Edited by Saji George Titus

 

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