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Informist, Thursday, May 21, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates are pricing in a repo rate hike of 50 basis points in June after a report said the Reserve Bank of India is weighing an increase in its policy rate, dealers said. The one-year OIS rate – the bellwether of domestic interest rate expectations – surged to a 16-month high of 6.44% Thursday. 

 

"If it's for currency defence, a 25-basis-point hike will not do, so the market is pricing in a 50-basis (point) hike for June," a dealer at a private-sector bank said. Some traders fear an off-cycle rate increase by the RBI's Monetary Policy Committee even before its next scheduled meeting on Jun 3-5. A 25-bps hike in an unscheduled meeting and another in June will effectively lead to the same outcome, pushing up swap rates, dealers said. The policy repo rate is currently 5.25%.

 

Bloomberg reported Thursday that the central bank was weighing all options, including a rate hike, to stabilise the rupee. The domestic currency had hit record closing lows for the eighth straight session Wednesday. It ended at 96.82 per dollar Wednesday, down nearly 8% in 2026. After the report and due to RBI intervention, the rupee surged to as high as 96.04 per dollar Thursday.

 

Significant dollar sales by banks on behalf of the RBI over the past week have provided only temporary relief to the rupee as fears of a wider current account deficit in 2026-27 (Apr-Mar) drive up demand for the dollar. India imports over 85% of its crude oil needs and the commodity's price has shot up over 60% since the start of the war in West Asia. Higher interest rates are expected to attract foreign investors into buying India's debt, with the inflows helping the rupee.

 

"Until yesterday (Wednesday), pricing was of a 25-bps hike in August, with a high chance of some hike in June," a dealer at a primary dealership said. "Now the entire curve has to reprice if any quantum of rate hike is brought forward, because the (Mumbai Interbank Outright Rate) fixing will affect OIS immediately."

 

Swap rates maturing in two months to one year rose 16-20 bps on Thursday. At 1330 IST, volumes in the one-year contract were up nearly 90% from Wednesday to INR 141.45 billion on the Clearing Corp. of India's trading platform. The one-month OIS rate was up 4 bps in a single trade at 1311 IST. Traders avoided large bets in the one-month contract because it was usually illiquid and, due to its short tenor, it was ineffective for hedging bonds against interest rate risk, dealers said.

 

However, some traders were not convinced that the central bank would pursue an interest rate defence of the rupee when it could take other steps. Instead, they expect the central bank to introduce a concessional scheme to attract foreign-currency non-resident deposits from banks.

 

The Bloomberg report also said the RBI may encourage state-owned banks or the government to issue foreign-currency-denominated bonds to attract inflows, a move bond traders were also expecting. Longer-term swap rates were up less than those maturing in up to one year, as the market had priced in a terminal repo rate of 6.50%, with no significant change in those expectations even if the RBI begins its hiking cycle less than six months after its last rate cut in December.

 

"It doesn't make sense for them (RBI) to do both things: hike rates and also take further steps to shore up the rupee. One or the other is enough," a dealer at a foreign bank said. "But the fact that the RBI sounded it out to the media suggests that they want to prepare the market for it."  End

 

US$1 = INR 96.37

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

 

Edited by Saji George Titus

 

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