India IRS Review
Down sharply as RBI MPC holds repo rate steady
This story was originally published at 18:43 IST on 5 June 2026
Register to read our real-time news.Informist, Friday, Jun. 5, 2026
By Janwee Prajapati
MUMBAI – Overnight indexed swap rates ended sharply lower Friday as traders unwound their paid positions after the Reserve Bank of India's Monetary Policy committee left the repo rates unchanged, dealers said. However, the 5-year swap rates fell more than the 1-year rates as traders are still pricing in a rate hike in the current financial year, dealers said.
The one-year swap rate ended at 6.04% Friday, down 8 basis points from 6.12% Thursday. The five-year OIS rate ended at 6.54%, down 9 bps from 6.63% Wednesday. The 1-year swap rate fell over 12 basis points intraday, whereas the 5-year swap rate declined 15 basis points, the sharpest fall in nearly 10 trading sessions. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 915.05 billion, lower than INR 1.09 billion Thursday.
Some traders expect the RBI to hike rates in the coming months, with the first hike likely in the second quarter of the current financial year, dealers said. Traders expect the OIS rate curve to steepen going ahead, with short-term rates falling more than the long-term rates, they said. However, the steepening will majorly depend on developments in the war in West Asia and the overall global scenario, dealers said.
"I think the rates up to the 1-year (1-year swap rate) would steepen the most," a dealer at a private sector bank said. "... One-month and two-month (swap) rates will mostly depend on the liquidity conditions in the system." Traders expect the Mumbai interbank outright rates to remain in the 5.35-5.40% range. Announcing the monetary policy, the RBI governor said government cash balances after the RBI's surplus transfer and the return of currency during the monsoon season will aid banking system liquidity in the near term. RBI's net liquidity absorbed from the banking system was INR 1.89 trillion Thursday, up from INR 1.71 trillion Wednesday.
The rate-setting panel unanimously decided to retain the policy repo rate at 5.25% and the policy stance unchanged at neutral. The central bank also announced measures to improve foreign inflows, which also pulled down swap rates, dealers said. The Reserve Bank of India announced foreign exchange swaps by Sept. 30 to incentivise external commercial borrowings by public-sector undertakings. Moreover, it has provided banks with full hedging costs till Sept. 30 to raise fresh 3-5-year FCNR(B) deposits.
"Swap rates were also down due to the fall in bond yields," a dealer at another private sector bank said. "The policy was positive for both bond yields and swap rates." The yield on the 10-year benchmark 6.48%, 2035 bond fell to the day's low of 6.94% following the MPC policy decision.
Traders who had paid fixed rates on the expectation of a repo rate hike unwound their positions to receive fixed rates, which also pulled down swap rates, dealers said. Traders do not expect the 1-year swap rate to rise above the crucial level of 6.10%, whereas the five-year swap rate is likely to be in a range of 6.40-6.64%, dealers said.
Data released at 1600 IST showed that the Indian economy grew faster than expected, 7.8% in the March quarter. Though bond yields rose following the higher GDP data, some traders said it will not have any impact on swap rates, as the data does not account for the impact of the war and the rise in crude oil prices. The Reserve Bank of India Friday cut its GDP growth forecast for FY27 to 6.6% from 6.9?rlier, with the June quarter growth revised down to 6.6% from 6.8?rlier.
OUTLOOK
On Monday, swap rates will take cues from movements in crude oil prices and developments in the US-Iran peace negotiations. Swaps could tumble if a peace deal between the US and Iran is announced over the weekend. There is uncertainty about when the rate-setting panel will begin raising the repo rate, given higher crude oil prices and rising inflation, they said.
Traders will also track any development on the inclusion of Indian government bonds on Bloomberg Index Services' flagship Global Aggregate Index after the Reserve Bank of India and the Centre Friday unveiled a slew of measures to improve foreign inflows, dealers said. Bloomberg, which deferred its decision on the inclusion of Indian bonds in January, said it plans to provide the next update on the potential inclusion by mid-2026. Most traders expect the review this month.
The movement of crude oil prices and US Treasury yields could also lend cues. The one-year swap rate is seen at 5.90-6.10% and the five-year at 6.50-6.64%.
| At 1700 IST | THURSDAY | |
| 1-year OIS | 6.04% | 6.12% |
| 2-year OIS | 6.23% | 6.34% |
| 5-year OIS | 6.54% | 6.63% |
| 2-year MIFOR | 6.61% | 6.78% |
| 5-year MIFOR | 6.89% | 7.12% |
End
US$1 = INR 94.95
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Saji George Titus
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