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Informist, Monday, Jul. 13, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended higher Monday following a rise in crude oil prices and US Treasury yields after an escalation in the West Asia conflict, dealers said. The rise in June CPI inflation was widely expected, but it also signalled greater pressure on the Reserve Bank of India's Monetary Policy Committee to raise rates sooner than the market had factored in, dealers said. 

 

The one-year swap rate closed at 5.83%, up from 5.77% Friday. The five-year swap rate ended at 6.24%, rising from 6.17% Friday. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to over INR 494.70 billion from INR 383.65 billion the previous day.

 

Brent crude oil for September delivery rose to $78.52 per barrel by 1700 IST Monday, up from $76.86 per barrel at the end of Indian trading hours Friday. The US carried out strikes on Iran over the weekend despite saying talks with Tehran would continue. Iran responded by targeting American bases in the Gulf countries. The attacks have again disrupted shipping through the Strait of Hormuz. 

 

Iran's Islamic Revolutionary Guard Corps said the vital waterway was closed, while US Central Command, which oversees operations in West Asia, said it remained open. The back-and-forth has raised doubts over a lasting US-Iran deal amid an already fragile truce. Following the escalation in West Asia, the yield on the 10-year benchmark US Treasury note also rose to 4.58%, up 3 basis points from the end of Indian trading hours Friday.

 

"There was bunched up paying today (Monday) since morning, which was natural because crude was up, USTs (US Treasury yields) were up, the rupee took a beating," a dealer at a primary dealership said. "Only those who had paid earlier were booking profits of 10 bps or so today (Monday). There were no inflows linked to FCNR (foreign currency non-resident bank) deposits. If swaps break these levels and crude goes above $80 a barrel, then it is an absolute level to continue paying from here." 

 

Last week, offshore traders had received fixed rates on the view that the repo rate is unlikely to rise soon, with the Indian crude basket in July averaging $70 per barrel, well below the RBI's estimate of $95 per barrel through 2026-27 (Apr-Mar). Foreign banks were also receiving OIS rates across tenures to deploy foreign currency non-resident bank deposits linked to an RBI measure announced in June.

 

At 1600 IST, government data showed India's CPI inflation rose to 4.38% in June from 3.93% in May, topping the Reserve Bank of India's medium-term target of 4% for the first time since January 2025. The print was marginally higher than the 4.3% median in an Informist poll. However, food inflation rose to 5.32% from 4.78% in the previous month and traders expect it to rise further due to the forecast of a deficient southwest monsoon. Moreover, core inflation rose to 4.1% in June from 3.8% in May as petrol and diesel price hikes percolated into the economy.

 

"Things are not going well in the war, that is sure. Both sides are being slowly pulled into it again," a dealer at a foreign bank said. "Based on the internals of the CPI, food inflation is rising once more, and so there is risk to the front-end (of the OIS curve), which has been taking it easy when it comes to rate hikes."  

 

The MPC was expected to keep the repo rate unchanged at 5.25% at its next two meetings in August and October, with inflation expected to rise in June and unlikely to make a case for a rate hike on its own. RBI Governor Sanjay Malhotra said in June that talk of rate hikes was premature. The central bank could look through the June inflation figure, as inflation had been below the target for the past 17 months and remained within its 2-6% tolerance band.

 

However, with tensions in West Asia ramping up, traders began pricing in the possibility of an October rate increase by the domestic rate-setting panel, dealers said. After the June CPI print, Crisil said it expects retail inflation to average 5.1% in FY27, in line with the RBI's full-year forecast. Some traders had hoped inflation would be below the forecast as crude oil prices retreated from a high of $120 per barrel to under $80 a barrel.

 

OUTLOOK

On Tuesday, OIS rates will take cues from movements in crude oil prices and US Treasury yields, dealers said. A sustained escalation in the conflict may lead traders to reassess their view that the repo rate in India will not be raised until December, with some already fearing a 25-basis-point increase by October. 

 

The last CPI inflation reading before the MPC's August meeting was in line with expectations but showed price pressures building and likely to increase in the coming months, dealers said. CPI inflation rose to 4.38% in June from 3.93% in May. With food and fuel prices driving retail inflation higher, traders are now reassessing their view on domestic interest rates. The MPC is likely to be influenced both by the durability of the re-emerging conflict in West Asia and the US Federal Open Market Committee's rate decisions, dealers said. 

 

Deficient rainfall and higher food prices may 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. This will limit a further fall in OIS rates, especially with the US FOMC expected to increase its policy rate in 2026.

 

Traders await Bloomberg's decision on the inclusion of Indian gilts in its flagship index, with most traders betting on a favourable decision. Traders also expect overnight rates to ease due to a liquidity boost from inflows into foreign-currency non-resident bank deposits. The Bloomberg announcement on the inclusion of Indian bonds is expected any time from next week to as late as September, dealers said. 

 

The movement in 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 6.06-6.35%. 

 

	At 1700 IST	FRIDAY
1-year OIS	5.83%	5.77%
2-year OIS	5.97%	5.92%
5-year OIS	6.24%	6.17%
2-year MIFOR	6.80%	6.76%
5-year MIFOR	6.99%	6.96%

 

End

 

US$1 = INR 95.62

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

 

Edited by Saji George Titus

 

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