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Informist, Thursday, Jul. 23, 2026

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended higher Thursday with the five-year swap recovering from the fall seen after the June meeting of the Reserve Bank of India's Monetary Policy Committee as Brent crude oil futures for delivery in September neared $99 per barrel, dealers said. Some traders paid fixed rates to hedge their bond purchases while offshore traders continued to pay fixed rates, they said.

The one-year swap rate closed at 6.04%, up from 6.00% Wednesday and the highest closing level since Jun. 10. The five-year swap rate ended at 6.53%, up from 6.48% Wednesday and the highest level since Jun. 8, the first session after the rate-setting panel's meeting ended Jun. 5. "With inflation in the picture, receiving in OIS doesn't look attractive at current levels, it's better as (hedging) protection for G-sec (government bonds)," a dealer at a mutual fund said.

The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform fell to INR 486.80 billion from INR 649.30 billion Wednesday. Brent crude oil futures for delivery in September rose to $98.72 per barrel at 1700 IST, from $96.27 per barrel at 0900 IST, and from $94.61 at 1700 IST Wednesday. The yield on the 10-year US Treasury note was 4.69% at 1700 IST, from 4.64% at the same time Wednesday.

Some traders, however, conducted reverse bond swaps by receiving fixed rate contracts in the five-year OIS while selling the five-year benchmark 6.36%, 2031 gilt, since the former offered a higher return despite being a non-funded instrument. The yield on the 2031 bond ended at 6.50%, while the five-year OIS ended at 6.53%. Others saw this trade as risky as swap rates have further scope to rise and therefore did not see current levels being lucrative enough to initiate received bets. 

"Whoever took a bond swap 15 days back has done well. It's been a good trade because now the spread has compressed quite a bit. We're also seeing some receiving in the three– to five-year (OIS) segment because of the FCNR inflows," a dealer at a private-sector bank said. Traders, especially from foreign banks, continued to hedge their foreign currency non-resident (bank) deposits--which offer a lower interest rate than a swap of comparable tenure--by receiving fixed rates in swaps, dealers said.

Volumes dropped amid caution and low risk appetite as several traders are unsure of the trajectory of swap rates, with more scope for upside. Traders maintained hedged positions and did not take on aggressive bets on either side of trade, with few willing to aggressively change positions, dealers said. 

OUTLOOK

Friday, swap rates are seen rising as, after market hours, near-month Brent crude oil prices rose above $100 per barrel. Subsequently, the yield on the 10-year US Treasury note hit 4.71%. Offshore traders are seen paying fixed rate contracts as the interest rate differential between safe-haven debt such as US Treasuries and emerging market rates such as Indian swap rates narrows, making the latter less appealing. Domestic traders may continue to pay fixed-rate contracts to hedge their bond purchases as bets of India's inclusion in Bloomberg's Global Aggregate bond index are likely to limit a rise in bond yields. Swaps will also track gilt yields.  

Receiving by foreign banks receiving FCNR(B) deposits and traders conducting reverse bond swaps may cap any rise in swap rates. Traders expect received flows from domestic banks' asset and liability management desks to step up if the five-year OIS rises to around 6.70%. The one-year swap rate is roughly pricing in more than three repo rate hikes within 12 months. Traders have mixed views on the trajectory of the swap rate curve, with some expecting the curve to steepen--wherein longer-term swap rates rise faster than short-term ones--as foreign inflows received through the various schemes are robust and keep short-term rates anchored due to the liquidity boost. Traders expect flows totalling around $40 billion by the first week of August. However, current liquidity tightness is adding to upward pressure on rates, dealers said. The overnight Mumbai Interbank Outright Rate has not been set below the repo rate since May 18.

Such a sharp overnight rise in crude oil prices could exert upward pressure on short-term rates as well, as rate hikes by the RBI's Monetary Policy Committee become more imminent. Traders are also closely tracking the movement of the rupee, with the currency depreciating sharply amid the rise in crude oil price. The currency depreciation could also erode expectations of foreign inflows. The one-year swap rate is seen in the range of 5.90-6.20% and the five-year at 6.35-6.66%.

End

US$1 = INR 96.5725

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

Edited by Rajeev Pai

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