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Informist, Wednesday, Jun. 24, 2026

NEW DELHI – Overnight indexed swap rates ended sharply lower Wednesday after Reserve Bank of India Governor Sanjay Malhotra's comments during the day erased pricing in of an August rate hike and even weakened bets of monetary policy tightening later in the financial year ending March, dealers said. Traders from across the market rushed to unwind paid fixed rates, leading to a surge in volumes as well. 

The one-year swap rate closed at 5.78% Wednesday, its lowest closing level since Apr. 20 and down from 5.85% Monday. The five-year swap rate ended at 6.18%, down from 6.28% the previous day, and its lowest close since Mar. 5. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform doubled to around INR 700 billion Wednesday from INR 347.55 billion Monday.

In an interview with television channel ET Now, Malhotra said it was premature to talk about repo rate hikes by the Monetary Policy Committee in the coming months and said policymakers had taken a conscious decision not to signal rate hikes by keeping the policy stance at 'neutral' at the June monetary policy review. The RBI also remained unsure about the second-round inflationary impact of the war in West Asia, with the top official calling the rise in prices from the hit to crude oil supply "one-time."

The comments came soon after the minutes of the MPC's last meeting, where the other members also seemed to favour a wait-and-watch approach. Combined with the continued sharp fall in Brent crude futures to near  the levels last seen before the West Asia war began, traders said the domestic policy rate may continue unchanged until the end of the calendar year, dealers said. However, the rate-setting panel will remain data-dependent and take note of risks on both growth and inflation going ahead, Malhotra reiterated in his comments Wednesday.

"August (rate hike) is entirely gone, October (rate hike) also looks pretty marginal in the one-year (swap rate)," a dealer at a foreign bank said. "The three- and six-month rates are no longer showing a material chance of a rate hike in October either, so that's why the market has moved and there is a lot of volume."  

A minority of traders had been expecting a repo rate hike from the current 5.25% at the next policy review in August, with inflation expected to climb in the coming months both due to higher crude oil prices and a deficient monsoon likely to push up food prices. However, Brent crude futures for August fell to near $75 a barrel Wednesday, the lowest for the near-month contract since Feb. 27 after which the US bombed Iran and began the war in West Asia. Traders now widely expect the Indian crude oil basket to average below the RBI's estimate of $95 per barrel in 2026-27 (Apr-Mar), which may help CPI inflation undershoot the forecast of 5.1% on average.

Even so, a repo rate hike of 50 bps starting October was widely expected before the governor's comments. With Malhotra waiving the intention to hike the repo rate in a hurry, traders saw it as a sign the RBI was not worried about CPI inflation averaging around 5% in FY27 since it was within the central bank's 2-6% tolerance band. Even as some traders joined economists from Nomura and Barclays in not expecting a repo rate hike in 2026, another section of the market was worried that the RBI has come out with too soft a tone at a time when other Asian central banks and even the US Federal Open Market Committee are expected to hike policy rates. 

"We thought the bar for rates hikes was high but now the RBI has gone out of its way to say they don't see the need for it at all and that crude was a one-time shock," a dealer at a private-sector bank said. "Although the market is very happy today I think there is a risk to staying on this path of easy policy that the governor seems to favour right now." 

OUTLOOK 

Swap rates may open steady Thursday after the tumble in OIS rates over the past two sessions on easing concern over rate hikes in India. Though most traders still see a base case of 50 bps of a repo rate increase in India FY27, the continued fall in crude oil prices and RBI comments seem to suggest the Monetary Policy Committee may forego material policy tightening, dealers said.

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. Even though most traders now do not expect a repo rate hike in August or October, they are wary of US FOMC rate hikes changing expectations sharply on domestic rates, dealers said.

Another positive is the likely inflow of 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. However, swap rates are seen rising in the medium term as domestic inflation is likely to rise due to weak monsoon and supply disruption in crude oil, dealers said.

The movement of the rupee and US Treasury yields could also lend cues. The one-year swap rate is seen at 5.70-5.94% and the five-year at 6.10-6.35%.

End

US$1 = INR 94.67

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

Edited by Akul Nishant Akhoury

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