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Informist, Thursday, Jul. 16, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended lower Thursday, tracking a fall in US Treasury yields and Brent crude futures falling below the psychologically crucial $85 per dollar mark. Traders avoided aggressive bets due to uncertainty on the trajectory on monetary policy in case of a flare-up in the war between the US and Iran, which had not shown signs of escalation over the last two days, dealers said. 

The one-year swap rate closed at 5.89%, down from 5.94% Wednesday. The five-year swap rate ended at 6.34%, lower than 6.38% Wednesday. Offshore traders who had hit stop-losses on their received fixed rate positions as swap rates rose over the past week were unwilling to bet on rates falling quickly, dealers said. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 504.85 billion Thursday, nearly identical to INR 504.60 billion the previous day.

OIS rates had opened little changed but eased during the day, largely driven by domestic banks and mutual funds receiving fixed rates. Benign US producer price index inflation data for June, released after Indian market hours Wednesday, followed the release of a lower than expected CPI inflation print. This eased bets of a rate hike by the US Federal Open Market and pulled down the 10-year US Treasury note to 4.58% by 1700 IST Thursday from 4.61% at the same time Wednesday.

"Offshore funds are a bit wary after burning their fingers on receiving flows and then OIS going up 20-25 bps," a dealer at a foreign bank said. "The front-end can start pricing in more rate hikes if oil goes up, but the problem is that the governor (Reserve Bank of India Governor Sanjay Malhotra) has said it is premature. So the upside there is capped."

Malhotra's comments last month downplayed the need for rate hikes as long as inflation expectations were contained, suggesting only a modest second-order impact of price shocks arising due to the war in West Asia. CPI inflation for June stood at 4.38%, against 3.93% in May, with a broad-based rise in fuel, food and core inflation. The one-year swap rate was largely reflecting a 25-basis-point increase in the policy repo rate at the Monetary Policy Committee's meeting in October, with status quo at the meeting in August, dealers said. 

Most traders see the OIS curve steepening, with longer-term rates rising quicker than near-term rates if the US and Iran set aside their peace deal from June and return to war. Offshore traders are more active in the five-year swap rate while tracking the movement of crude prices and US yields, which are expected to react adversely to an escalation in West Asia. In contrast, the one-year swap rate is considered the bellwether of near-term repo rate expectations. With Brent futures for September delivery rising nearly 20% over the past week, the spread of the five-year OIS rate over the one-year rate is hovering near 45 bps, its highest since early June. 

"It's a bit tricky to place large spread trades when rate expectations are moving so fast and so fluidly the world over," a dealer at primary dealership said. "But the fact is that five-year (OIS) has seen the bulk of the volume and the reaction this week, so it should be more exposed."

However, both the one- and five-year swap rate are expected to move in tandem if crude oil prices slump and there is a breakthrough in reopening the Strait of Hormuz, through which a fifth of the world's oil used to flow before the war. The one-year swap rate may fall around 20 bps from current levels to 5.70%, and the five-year swap rate may also decline by a similar amount to around 6.14%, dealers said.

OUTLOOK

On Friday, OIS rates will take cues from movements in crude oil prices and US Treasury yields, dealers said. Developments in West Asia will also influence traders' views on domestic rate increases due to the potential impact on imported inflation. Traders may avoid aggressive bets before the weekend, with the potential of an escalation looming when oil markets are shut, they 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. The RBI projects CPI inflation to average 5.9% in Oct-Dec, higher than the policy rate of 5.25%. The view of rate increase in India is influenced by the expectation that the US Federal Open Market Committee may also hike rates in 2026, dealers said. 

In addition, 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 between this week and September, dealers said. 

The movement in the rupee could also lend cues. The one-year swap rate is seen in the range of 5.78-6.05% and the five-year at 6.18-6.45%. 

End

US$1 = INR 96.35

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

Edited by Avishek Dutta

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