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Informist, Tuesday, Jun. 2, 2026

By Cassandra Carvalho

MUMBAI – Most overnight indexed swap rates ended lower Tuesday, especially swaps maturing in a year or more, as mutual funds and offshore traders received fixed rate contracts, dealers said. An easing of US Treasury yields and Brent crude oil prices helped, they said.

The one-year swap rate ended at 6.09%, down from 6.12% Monday. It moved in the range of 6.07-6.11%. The five-year OIS rate ended at 6.60%, down from 6.64% Monday. It was traded in the range of 6.58-6.64%.

"Mutual funds are quite active today (Tuesday) and geopolitically if US and Iran come closer to a deal then we could fall to 6.55% (on the five-year OIS)," a trader at a primary dealership said.

Mutual funds continued to receive fixed rate contracts in swaps, especially in the three-year and four-year tenures, to maximise their returns on investments in floating rate corporate bonds, dealers said. Tuesday, Small Industries Development Bank of India issued three-year floating rate bonds for INR 30 billion. Offshore traders were also receiving fixed rates, likely tracking an easing of US yields. The yield on the benchmark 10-year US Treasury note was 4.43% at 1700 IST, down from 4.45% at 0900 IST and 4.46% at 1700 IST Monday.

"Even with strikes restarting, crude has been well-behaved, it has not gone above $100 (per barrel) which is why we have seen global rates cool off," a dealer at a corporation said.

However, the fall in swaps was limited as the five-year OIS bounced back after hitting its 50-day moving average of about 6.59%, a technical indicator it has not fallen below in nearly seven months, dealers said. 

OUTLOOK

Wednesday, swap rates will track the movement of US Treasury yields after the release of jobs data in the world's largest economy. Swaps will also track crude oil prices and developments in the US-Iran peace negotiations. However, traders will refrain from taking fresh positions ahead of the outcome of the Reserve Bank of India's Monetary Policy Committee's meeting, dealers said. Most traders are cautious ahead of the policy decision Friday because of uncertainty on when the rate-setting panel will begin raising the repo rate due to increased crude oil prices, they said.

Traders expect the rate-setting panel to opt for a "hawkish hold" on the repo rate Friday. At least one of the three external members of the Monetary Policy Committee could vote for a rate hike, dealers said. A few traders expect the committee to change its stance to "withdrawal of accommodation" from neutral. Traders also expect the RBI to cut its GDP growth forecast for the financial year 2026-27 (Apr-Mar) by 20-30 basis points while the estimate for FY27 CPI inflation could be raised to above 5% from 4.6% currently, dealers said. If the inflation forecast is raised by 50 bps, the rate hike cycle could be quicker, dealers said. The one-month swap rate is pricing in less than 25 bps of a rate hike in June, dealers said. 

Dealers hope the central bank will announce measures to curb the rupee's depreciation, weakening the case for a policy repo rate hike. Some dealers expect more dollar-rupee buy-sell swap auctions to be conducted after the RBI held one last week. Swaps could surge if the central bank does not announce measures to attract capital inflows at the policy decision Friday, dealers said. Traders expect the RBI to announce concessions on external commercial borrowings by banks and corporations, or subsidies on hedging costs for dollar exposure. The RBI could also offer concessions on interest rates on foreign currency non-resident deposits for banks, dealers said. Such measures could pull down money market rates while stabilising the rupee, dealers said.

Traders have mixed views on liquidity, with some saying it will be comfortable once the RBI's transfer of surplus to the Centre for FY26 is reflected in the banking system. Others expect the overnight Mumbai Interbank Outright Rate to remain above the repo rate as the central bank is unlikely to infuse durable liquidity in the system to avoid pushing up inflation, dealers said. 

Movement in the rupee and overnight money market rates will also influence swaps. The one-year swap rate is seen at 5.90-6.40% and the five-year at 6.50-6.90%.

End

US$1 = INR 95.2650

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

Edited by Rajeev Pai

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