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Informist, Thursday, May 21, 2026

By Janwee Prajapati

MUMBAI – Overnight indexed swap rates ended sharply higher as traders priced in a 25-50 basis point rate hike by the June monetary policy review following a Bloomberg report that the Reserve Bank of India was considering a repo rate hike to support the rupee, dealers said. Positive developments towards the conclusion of the West Asia war had led to a fall in swap rates at the open.

"OIS rates rose only because of that one comment (Bloomberg report)," a dealer at a private sector bank said. "In morning, the sentiment was mostly positive because of the $5 billion swap (rupee-dollar buy-sell swap). The US yield and crude were also down." 

The one-year swap rate ended at 6.36% Thursday from 6.21% the previous day, trading in a 6.05-6.44% band. At the day's high, the one-year swap rate hit its highest in 17 months. The one-year swap rate was the most volatile as traders brought forward their expectations of rate increases. However, swaps have priced in more than 125 bps of a policy rate hike in the next 12 months. Traders do not yet expect the RBI's Monetary Policy Committee to hike the repo rate beyond 6.50-6.75% in the current cycle from 5.25% currently, capping a further rise in swaps, dealers said.       

The five-year OIS rate closed at 6.85%, higher from 6.80% Wednesday. The five-year swap rate was down 4 bps from the day's high while up 15 bps from the day's low of 6.70%. Some traders said the five-year OIS rate was not likely to rise above the psychologically crucial 6.90% level, where profit booking on fixed rate bets will be aggressive, dealers said. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 841.45 billion Thursday, up from INR 791.55 billion the previous session.

"...The Bloomberg report was a combination of news and measures, but people only picked up that one line," a dealer at a primary dealership said. "Personally, I do not think there will be a rate hike in this meeting (MPC meeting in June)...but it all depends on whether there is a (peace) deal or not, there is still 15 days left for the meeting."

Some traders received fixed rates as they did not expect the swap rates to rise further due to hopes of US-Iran peace deal, dealers said. Some foreign banks and offshore traders also received fixed rates in low volumes, which limited the rise in swap rates, dealers said. Some traders do not expect the MPC to hike rates till later in the year if the two warring nations strike a peace deal. 

Overnight, US President Donald Trump said talks with Iran were in the final stages and that the US might have to strike harder, but would hold off to see if a deal could be reached. Iran said it was reviewing a new US proposal to end the West Asia conflict, with Trump calling the negotiations on the "borderline" between an agreement and renewed strikes. Iran's foreign ministry spokesperson added that messaging between Tehran and Washington was ongoing.

This led to an overnight fall in US Treasury yields and crude oil prices, which brought down swap rates early in the day. An intraday rise after a Reuters report that Iran did not favour enriched uranium leaving the country led to both the one- and five-year swap rate inching up later in the day, dealers said. Brent crude oil futures for July delivery traded at near $107 per barrel at 1700 IST after falling to below $104 per barrel. However, crude oil prices were down from over $108 per barrel at the end of Indian trading hours Wednesday. At 1700 IST, the benchmark 10-year US Treasury yield was 4.61%, up from 4.59% at 0900 IST but down from 4.64% at 1700 IST Wednesday.

OUTLOOK

Swap rates are expected to open steady Friday if there was no major development in the West Asia war. Traders have already priced in a 25-50 bps repo rate hike in June and around 125 bps of total rate increases in the next 12 months, dealers said.

They said the RBI's plan to inject rupee liquidity through a three-year, $5 billion dollar-rupee buy-sell swap auction should help cap short-term OIS rates. The overnight Mumbai Interbank Outright Rate, which serves as the floating leg for OIS contracts, is likely to hold in the 5.15-5.30% range until the MPC's next rate decision on Jun. 5, unless the rate-setting panel hikes the repo rate in an off-cycle meeting.

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 and US Treasury yields, they said. 

For India, dealers said the ongoing blockade of the Strait of Hormuz and Brent futures staying above $100 a barrel strengthened the case for an MPC rate hike, as the spillover would start showing up in retail inflation. With petrol and diesel prices raised twice since Friday and further hikes expected, CPI inflation could move toward the upper end of the RBI's 2-6% tolerance band later in FY27.

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 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 6.60-6.90%.

End

US$1 = INR 96.20

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

Edited by Akul Nishant Akhoury

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