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Informist, Thursday, Jul. 9, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended largely steady, with crude oil prices and US Treasury yields near the same levels as they were on Wednesday, dealers said. While overall direction was directed by developments in the West Asia war, foreign banks continued to unwind their fixed rate bets as the view of rate hikes in India in August or October remained thin, dealers said.

 

The one-year swap rate closed at 5.81%, slightly higher than 5.80% Wednesday. The five-year swap rate ended at 6.21%, flat against the previous close. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform fell to INR 444.50 billion from INR 706.70 billion Wednesday.

 

Swap rates had declined slightly during the day as Brent crude futures for September delivery eased below $77 per barel, before rising to nearly $79 a barrel by the end of Indian market hours Thursday. The crude contract was near $78 per barrel at 1700 IST Wednesday. Meanwhile, the 10-year US Treasury yield also rose to the day's high of 4.59% by the end of Indian trading hours.

 

"We are continuing to see incremental movement based on the headlines and what is happening in the war," a dealer at a private sector bank said. "People don't seem to want to take very aggressive positions until we know whether they (the US and Iran) are fighting or not fighting." 

 

Foreign banks preferred to receive fixed rates as well as unwind prior paid fixed rate bets after getting inflows from foreign currency non-resident deposits, dealers said. The rise in deposits was effectively being deployed into OIS instead of being parked into bonds, they said. Some traders also said banks that had written bond forwards or forward-rate agreements with insurers unwound their hedges on those instruments, which were essentially paid fixed rate bets, dealers said.

 

Despite the flare-up in the West Asia war, traders do not not expect escalation to an all-out conflict, as seen in March, dealers said. Inflation remains above target levels in the US, the world's largest economy, with expectations of interest rate hikes by the US Federal Open Market Committee in 2026, something US President Donald Trump may want to subdue before the mid-term elections in the US in November, dealers said.

 

Even domestically, swap rates had jumped Wednesday but were not volatile Thursday as most traders do not expect the Monetary Policy Committee to increase the policy repo rate of 5.25% at its next two meetings in August and October. RBI Governor Sanjay Malhotra had said on Jun. 24 that it was premature to talk about repo rate hikes 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 while others remained sanguine.

 

"Foreign institutions are receiving, domestic fund-raising that is happening is being hedged," a dealer at a private sector bank said. "So, there is a lot of pressure on the swap rates to go down rather than up, as the market is not convinced the RBI is ready to hike rate anytime soon." 

 

OUTLOOK

On Friday, swap rates are seen tracking overnight developments in West Asia 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 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 on Monday, which traders expect will top the RBI's medium-term target of 4%. This is the last retail inflation reading scheduled before the MPC's meeting in August. 

 

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 5.70-5.95% and the five-year at 6.06-6.32%. 

 

	At 1700 IST	WEDNESDAY
1-year OIS	5.81%	5.80%
2-year OIS	5.96%	5.96%
5-year OIS	6.21%	6.21%
2-year MIFOR	6.76%	6.79%
5-year MIFOR	6.97%	7.00%

 

End

 

US$1 = INR 95.39

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

 

Edited by Avishek Dutta

 

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