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Informist, Wednesday, Jun. 3, 2026

 

By Aaryan Khanna

 

MUMBAI – Overnight indexed swap rates ended higher as crude oil prices rose after the war in West Asia flared up again, dealers said. However, the rise was limited as most traders were divided on whether the Reserve Bank of India's Monetary Policy Committee will hike the policy repo rate Friday.

 

The one-year swap rate ended at 6.11% Wednesday, up slightly from 6.09% Tuesday. The five-year OIS rate ended at 6.63%, up from 6.60%. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 811.80 billion, sharply higher than INR 484.95 billion Tuesday.

 

"The war situation is a recurring problem. Not only is Brent back above $95 (per barrel) but this is leading into the RBI policy," a dealer at a foreign bank said. "So the governor has less leeway to sound composed and stoic and say he is willing to look through the shock if rockets are flying across the Strait of Hormuz again."

 

Brent crude oil futures for August delivery rose to $97.95 per barrel at 1700 IST, higher than $93.88 per barrel at the end of Indian trading hours Tuesday. Iran and US allies in West Asia traded missile fire Tuesday and Wednesday, nearly two months into a fragile ceasefire. While a peace deal between the US and Iran seemed imminent last week, hopes of such a deal have faded as Israel presses on with its invasion of Lebanon. Tehran has said a ceasefire in Lebanon is a prerequisite to a peace deal and reopening the Strait of Hormuz. US Treasury yields also rose overnight following the aggression.

 

While global cues were negative, traders avoided building up paid fixed rate positions before the Monetary Policy Committee's rate decision Friday. Swap rates were pricing in a significant chance of a 25-basis-point repo rate hike from the current 5.25%, dealers said. Though most traders do not expect a rate hike, hedging activity on bondholdings has driven up swap rates, they said. RBI Governor Sanjay Malhotra is only expected to set the stage for rate hikes later in the financial year ending April, dealers said.

 

"Nobody is in the mood to pay, the risk of RBI being softer (than what OIS rates reflect) is more likely than a rate hike right now," a dealer at a private-sector bank said. 

 

OUTLOOK

Thursday, swap rates will take direction from 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 Monetary Policy Committee's rate decision Friday, dealers said. Most traders are cautious ahead of the policy decision because of uncertainty on when the rate-setting panel will begin raising the repo rate, given the increased crude oil prices and rising inflation, they said.

 

Traders expect the rate-setting panel to opt for a "hawkish hold" on the repo rate Friday. One of the three external members of the panel may vote for a rate hike, dealers said. A few traders expect the panel 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 measures, 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%.

 

	At 1700 IST	TUESDAY
1-year OIS	6.11%	6.09%
2-year OIS	6.34%	6.30%
5-year OIS	6.63%	6.60%
2-year MIFOR	6.75%	6.72%
5-year MIFOR	7.07%	7.04%

 

End

 

US$1 = INR 95.7050

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

 

Edited by Rajeev Pai

 

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