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Informist, Wednesday, Jul. 8, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended sharply higher Wednesday as the faltering peace deal between the US and Iran led to a sharp rise in crude oil prices and US Treasury yields, dealers said. During market hours, US President Donald Trump said he believes the memorandum of understanding signed between the two countries in June "is over" and it was a waste of time dealing with Iranian officials.

 

The one-year swap rate closed at 5.80%, up from 5.73% Monday. The five-year swap rate ended at 6.21%, rising from 6.12% Tuesday. The rise in the five-year OIS rate due to global triggers led to stop-losses near 6.20% for traders who had received fixed rates betting on the rate to fall for the fifth straight day. Both tenures had closed at four-month lows Tuesday.

 

The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform surged to INR 706.70 billion, against INR 491.85 billion Tuesday. The five-year contract's notional trading volume hit a record high for the second time in two days, rising to INR 341.50 billion Wednesday from INR 247.95 billion in the previous session. 

 

Tensions in West Asia have mounted over the past few days as Iran attacked commercial vessels crossing the Strait of Hormuz, followed by both Iran and the US striking military targets overnight. The near-month Brent crude futures had topped $75 per barrel after more 10 days Tuesday after Indian market hours, which pushed swap rates up in early trade Wednesday.

 

Following Trump's comments, Brent futures for September delivery surged to nearly $80 per barrel Wednesday before hovering near $78 a barrel at the end of Indian market hours, up from $72.59 per barrel at 1700 IST Tuesday. The 10-year US Treasury yield also hit its highest in nearly a month Wednesday and was at 4.56% at 1700 IST.

 

"The market had removed rate hikes in any pricing. If the war is going to start again, we need to begin pricing it in, no matter what the RBI governor says," a dealer at a private-sector bank said. "Today was a knee-jerk reaction more than anything, but we will have to see whether Trump wants to continue this war or whether he will change stance again."

 

RBI Governor Sanjay Malhotra had said on Jun. 24 that it was premature to talk about repo rate hikes by the Monetary Policy Committee in the coming months. Since his comments, swap rates--which reflected fears of a 125 basis-point repo rate increase in 12 months at the peak of the West Asia war--cooled to reflect only two rate hikes of 25 bps each. With fears mounting of the vital Strait of Hormuz being closed again, some traders fear the rate-setting panel may have to reassess its internal timeline for rate hikes.

Offshore traders may have paid fixed rates after unwinding those bets over the last few sessions, which had helped the five-year OIS to fall below its 200-day moving average of 6.14?rlier this week. Some insitutions had also been unwinding paid positions that served as a hedge for their underlying bond holdings. This led to increased volatility in the OIS market Wednesday, without traders reassessing the trajectory of the Indian rate cycle, dealers said.

 

"Pricing has added almost one more rate hike now, we are around 3 (rate hikes expected) in the next year," a dealer at a primary dealership said, commenting on the one-year OIS rate. "It is difficult to say whether the market is looking at an August or October rate hike since there were no volumes in the swap rates of two or three months."

 

Most traders said geopolitical flare-ups are likely to continue in the coming months, but the war is unlikely to escalate to levels seen in March, where military strikes took place daily. Even though Trump has ratcheted up his rhetoric around Iran, dealers said the US president may change his views in a matter of days, based on past commentary.

 

Moreover, the consequences in the US may make the world's largest economy wary of returning to a wider and open conflict in West Asia. Inflation remains above target levels and the spectre of rate increases hangs over the next few US Federal Open Market Committee meetings, something that Trump may want to subdue before the mid-term elections in the US in November, dealers said.

 

OUTLOOK

Thursday, swap rates are seen tracking the movement of developments in West Asia overnight to gauge whether the ceasefire between the US and Iran will hold. The related movement in crude oil prices and US Treasury yields are likely to move OIS rates amid a lack of scheduled domestic rate triggers, dealers said. An escalation in the conflict is likely to lead to swap rates rising by another 10 basis points as traders price in a domestic rate hike in August or October.

 

The next domestic rate trigger is the release of CPI data for June Monday, which traders expect will top the RBI's medium-term target of 4%. This is the last retail inflation reading scheduled before the Monetary Policy Committee's August monetary policy review. 

 

Deficient rainfall and higher food prices are expected to push up retail inflation in the coming months while the RBI is likely to drain systemic liquidity ahead of a likely rate hike cycle, dealers said. However, no rate hike is expected until December after assessing recent commentary from RBI officials, they added.

 

Traders await Bloomberg's decision on the inclusion of gilts in its flagship index, with most traders betting on an inclusion. Traders also expect overnight rates to ease due to a liquidity boost from inflows into foreign-currency non-resident bank deposits.

 

The movement of the rupee could also lend cues. The one-year swap rate is seen in the range of 5.60-5.90% and the five-year at 6.05-6.23%. 

 

	At 1700 IST	TUESDAY
1-year OIS	5.80%	5.73%
2-year OIS	5.96%	5.87%
5-year OIS	6.21%	6.12%
2-year MIFOR	6.79%	6.68%
5-year MIFOR	7.00%	6.90%

 

End

 

US$1 = INR 95.55

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

 

Edited by Rajeev Pai

 

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