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Informist, Monday, May 25, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates tumbled on Monday on signs of progress in a peace deal between the US and Iran to end the war in West Asia, dealers said. The sharp fall in Brent crude futures to under $100 per barrel over the weekend and the progress led to traders wiping bets on rate hikes at the Monetary Policy Committee's next meeting in June, they said.

The one-year swap rate ended at 6.15% Monday, down from 6.30% Friday. The five-year OIS rate closed at 6.67%, down from 6.82% Friday. The 15-basis-point fall in both benchmark swap contracts was the most since May 6. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 573.05 billion from INR 445.25 billion Friday.

"The activity was both onshore and offshore. There is a big wave of change happening on the war front and that is translating," a dealer at a primary dealership said. "I don't know if everyone wants to believe that no rate hike but pricing at least seems to suggest it is not happening anymore." Last week, the one-year swap rate had climbed to a 16-month high of 6.44%, flashing a warning sign that the Reserve Bank of India's rate-setting panel would hike the repo rate of 5.25% by 50 bps next week. 

Brent crude futures for July delivery were at $97.75 per barrel at 1700 IST Monday, over 7% lower than the level at the end of Indian market hours Friday. Reports from both the US and Iranian officials suggested diplomatic activity had increased and the two sides were nearing a deal, which is expected to re-open the Strait of Hormuz and increase crude oil supply. US President Donald Trump had also declared on social media that the deal was mostly done, though an Iranian foreign ministry spokesperson Monday reportedly said the deal could not be called "imminent".

Both the one- and five-year swap rates ended at the day's lows with little activity due to the intraday movement in crude oil prices. Traders sharply unwound their bets on June and August rate hike, now saying the repo rate may only rise in October or beyond. The three-month swap rate, encompassing the June and August policy decisions, fell 6 basis points Monday to 5.62%. It is now pricing in around a 50% chance of a rate hike in August, dealers said. The one-year swap rate shows a rate hike of around 100 bps in the next 12 months, they said.

CPI inflation was below the RBI's 4% target in April, the latest reading, but is expected to rise to near 6%, the upper end of the RBI's tolerance band later in 2026-27 (Apr). However, the MPC may choose to look through initially higher prints to ensure India's growth does not slow down sharply, especially if the geopolitical cue leading to higher inflation is out of the picture, dealers said, referring to the war. However, some offshore investors remained wary in case a peace deal was not struck and held on to their paid fixed rate positions Monday, awaiting further signs of de-escalation.

"We did not get a big flow. Corporates are unwinding (paid positions) and mutual funds and banks have been receiving from the late 80s (when the five-year rate was above 6.85%)," a dealer at a foreign bank said. "People want clean delta now. Nothing heavy on either side seeing the vol (volatility)."

OUTLOOK

On Tuesday, swap rates will track developments in the West Asia war and its impact on crude oil prices, dealers said. With recent reports suggesting fruitful negotiations between the US and Iran, traders expect the warring parties to sign a peace deal as early as this week. This is likely to drag down the one-year swap rate to 5.90% and the five-year OIS rate to 6.40%, dealers said.

If there is no end to the war in sight, traders may exit their received bets on fears of rising inflation. If the war does not end, the possibility of the MPC raising the policy repo rate in June will rise, they said. The Strait of Hormuz has been shut for nearly three months since the US and Israel bombed Tehran and killed Iran's supreme leader. In peace time, around 20% of the world's oil and half of India's crude demand transitted the vital waterway.

While most trades on OIS rates will be influenced by global factors, any further comments by policymakers on domestic monetary policy will also lend cues. Even without a rate hike in June, traders expect the RBI to signal monetary policy tightening, with the potential of higher overnight rates, dealers said. 

The movement in the rupee and overnight money market rates will also influence swaps. Tuesday, the one-year swap rate is seen at 6.00-6.40% and the five-year at 6.50-6.90%.

End

Edited by Deepshikha Bhardwaj

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