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Informist, Tuesday, May 26, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended lower on Tuesday, reversing a rise in the first half of the day. Mutual funds and corporate houses were likely receiving fixed rates to hedge their bond holdings, dealers said. Swap rates had risen earlier due to a fresh skirmish between the US and Iran near the Strait of Hormuz, which led to higher crude oil prices and US Treasury yields. 

 

The one-year swap rate inched down to 6.14% from 6.15% Monday, after rising to 6.20?rlier Tuesday. The five-year OIS rate ended at 6.63% Tuesday, down from 6.67% the previous day. The swap rate had climbed to as high as 6.72% Tuesday. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 623.45 billion from INR 573.05 billion Monday.

 

Brent crude for July delivery briefly touched $100 a barrel after the US bombed several cities in southern Iran, calling it a "defensive" attack. Iranian authorities reportedly promised a swift and decisive response, testing the fragile ceasefire. OIS traders had expected the two sides to agree to a peace deal this week following reports of progress in talks.

 

While this led to an early rise in swap rates, a fall in crude and US Treasury yields around 1600 IST wiped it out. The Brent futures contract fell to $98.72 per barrel by 1700 IST, well off intraday highs but up from $97.75 a barrel at the end of Indian market hours Monday. The 10-year US Treasury note fell to 4.48% by 1700 IST, down from 4.51?rlier in the day. 

 

"The market had reacted to the escalation in the war in the morning," a dealer at a private-sector bank said. "But since US yields came down and so did crude, the sense was, why should we remain so hesitant when the major markets are not? There is also a strong sense that the RBI will bring in measures for the rupee very soon."

 

The central bank had discussed measures to improve capital inflows with treasury heads and economists last week. Bankers widely expect the RBI to introduce a concessional window to bring down hedging and conversion costs, encouraging fundraising in foreign currencies. Some dealers expect such a window this week, while others said the central bank may announce it after the Monetary Policy Committee's meeting next week.

 

Offshore traders had been unwinding their paid positions above 6.70% on the five-year swap rate on the view that India's repo rate would not rise much beyond 6.50%, the repo rate before the MPC began cutting rates in 2025. A quick end to the West Asia war, which was the base case, would reduce the pressure for an immediate rate hike, dealers said. Recent comments from RBI Governor Sanjay Malhotra in an interview also suggested no urgency to hike interest rates to defend the rupee, they said. 

 

The one-year swap rate reflected that the policy repo rate of 5.25% will increase by over 100 basis points in the next 12 months. A rate hike in August was fully priced in and the one-month swap rate reflected around a 50% chance of a 25-bps rate hike in June as well, dealers said. However, the pricing of near-term swap rates has been distorted by high Mumbai Interbank Outright Rates in recent days, they said.

 

The overnight MIBOR rate – the floating leg of the OIS contract – was set at 5.43% for the third straight session Tuesday. Barring one day, it has been set above the repo rate of 5.25% since May 11. Most dealers expect the MPC to keep the repo rate unchanged in June and swap rates may fall as the MIBOR rate eases later this week, dealers said. 

 

Meanwhile, volumes in the three-year OIS rate jumped to INR 80.10 billion Tuesday from INR 7.20 billion Monday. Mutual funds which had invested in floating-rate bonds issued by several companies over the past few sessions aggressively received fixed rates. This increased their payouts and effectively made the investment a fixed-rate-of-return asset for them, dealers said. Corporations that had issued fixed-rate bonds were also receiving fixed rates, though at a slower pace than Monday, they said. 

 

"The counterparties who are making a market for mutual funds to receive in the three-year (OIS) rate, even corporates, as receiving themselves in two- and five-year points," a dealer at a primary dealership said, referring to the more liquid OIS contracts. "Everyone wants to lock in these attractive OIS rates one way or another. It makes a lot of sense for a medium-term investor to do this if he has no mark-to-market risk."

 

OUTLOOK

On Wednesday, swap rates will track developments in the war in West Asia 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. However, the exchange in attacks between the US and Iran Tuesday has led to some of the optimistic traders unwinding their received fixed rate bets. 

 

If there is no end to the war and military operations in West Asia resume, traders may exit their received bets on fears that higher inflation will percolate into India through imports. 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 peacetime, around 20% of the world's oil and half of India's crude demand transited this vital waterway.

 

While OIS rates will be largely influenced by global factors, any further comments by policymakers on domestic monetary policy will also provide 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. However, some dealers hope that the central bank will announce measures to curb the rupee's depreciation before the MPC meeting, weakening the case for a policy repo rate hike. 

 

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

 

	At 1700 IST	MONDAY
1-year OIS	6.14%	6.15%
2-year OIS	6.31%	6.35%
5-year OIS	6.63%	6.67%
2-year MIFOR	6.98%	7.01%
5-year MIFOR	7.31%	7.34%

 

End

 

Edited by Saji George Titus

 

 

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