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Informist, Tuesday, Jun. 23, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower Tuesday due to flows from foreign institutions receiving fixed rates, dealers said. The limited risk of rate hikes by the Reserve Bank of India's Monetary Policy Committee at its next meeting in August contributed to the positive view on swap rates, they said. 

The one-year swap rate closed at 5.84% Tuesday from 5.88% Monday, its lowest closing level since Apr. 22. The five-year swap rate ended at 6.26%, down from 6.34% the previous day, and its lowest close since Mar. 6. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 347.55 billion Tuesday, sharply up from INR 191.35 billion Monday. 

A global risk-off environment favoured India despite high US Treasury yields after the truce in the West Asia war, with several Asian central banks seen hiking policy rates while the RBI's MPC is expected to hold off on rate hikes immediately, dealers said. Trade volumes surged in the second half of the day as offshore hedge funds paid fixed rates in other Asian markets while receiving the five-year OIS rates, they said.

"There are likely model payments coming in from overseas that have pulled OIS down," a dealer at a primary dealership said. "We heard both paid and receiving flows from offshore since morning, though the amount rose in the second half of the day and that pushed down the five-year (OIS) below that 6.26-6.28% band that was a support."

The fall in the one-year OIS was more limited as traders still expect rate hikes later in the financial year, likely starting October. Traders still expect the MPC to hike the policy repo rate of 5.25% by at least 50 basis points keeping in mind an expected rise in food inflation due to a deficient monsoon and the passthrough of the supply chain disruptions caused by the war in West Asia since March. The RBI forecasts CPI inflation to average 5.1% in 2026-27 (Apr-Mar), above its 4.0% target and only slightly below current repo rate.

"The one-year (swap rate) has an absolute bottom at 5.80%. You must still have two rate hikes priced in considering inflation, US rate hike expectations, and El Nino," the dealer quoted above said.

Traders were surprised with the continued fall in Brent crude oil prices. The prevalent view in the market was that despite positive developments around the peace negotiations between the US and Iran, the crude oil prices may not sustain below the crucial $80 per barrel mark, dealers said. The US Monday issued a 60-day licence allowing Iran to sell oil in the international market while both the countries prepare for further negotiations aimed at reaching a permanent peace agreement. Brent crude fell to an intraday low near $76 a barrel, from $79.25 at the end of Indian market hours Monday.

"All the reports we read over the past two months told us that Brent should not fall below $80 (per barrel). Now it is sustaining there," a dealer at a mutual fund said. "That is contributing to the reduction of the market pricing in rate hikes but we should be wary in case the US starts hiking rates." 

Traders said the upside risk for swap rates is limited with the RBI's measures to lure foreign inflows likely to stabilise the rupee and weaken the case for tight monetary policy. The central bank may also look through inflation in the coming months provided there are no second-round effects and inflation expectations do not shoot up, dealers said.

OUTLOOK

Swap rates are seen tracking the overnight movement in crude oil prices on Wednesday. Offshore flows may also dictate the movement in swap rates, with no significant releases expected on the domestic rate view this week, dealers said. Most traders do not expect the RBI's MPC to hike the policy repo rate of 5.25% in August despite rising inflation.

Short-term swap rates may remain under pressure this week due to a crunch in banking system liquidity, before easing next week on the government's spending adding to systemic liquidity. System liquidity fell into a deficit Monday for the first time since Mar. 22. The overnight Mumbai Interbank Outright Rate has been set above the repo rate since May 19 and has been in the 5.38-5.44% band since Jun. 15.

A likely liquidity boost due to the RBI's measures to lure foreign capital is seen adding to the fall in short-term rates but at the same time, the central bank is likely to drain this liquidity starting in July, dealers said. Deficient rainfall and higher food prices are seen pushing up retail inflation in the coming months. The MPC may raise the repo rate in October, especially if the US Fed begins raising rates, they said.

Swap rates are seen rising in the medium term as domestic inflation is likely to rise due to the weak monsoon and supply disruption in crude oil, dealers said. Swap rates may fall if there is an uptick in non-resident dollar-denominated bank deposits of three- to five-year tenors. This is likely to lead to demand for short-term bonds and banks may begin to unwind their paid fixed rate positions that were hedging against a fall in the prices of their bond holdings, dealers said.

The movement of the rupee and US Treasury yields could also lend cues. The one-year swap rate is seen at 5.76-5.94% and the five-year at 6.18-6.40%.

End

US$1 = INR 94.74

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

Edited by Akul Nishant Akhoury

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