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Informist, Monday, Jul. 27, 2026

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended sharply down Monday and lower for the second consecutive session tracking a fall in near-month Brent crude oil futures to below $90 per barrel while banks also received fixed rate contracts to hedge inflows received through foreign currency non-resident (bank) deposits, dealers said. 

The one-year swap rate closed at 5.91%, down from 5.98% Friday. The five-year swap rate ended at 6.36%, down from 6.49% Friday. The one-year swap rate ended nearly 8 basis points lower, the biggest single-day fall since Jun. 5, the day the Reserve Bank of India's Monetary Policy Committee announced its policy decision last month. The five-year swap rate ended 14 bps lower, the most in a day since May 25. 

"It's just liquidity-driven receiving," a dealer at a private-sector bank said. "Whoever is getting (foreign) flows is on the receive."

In an interview with financial daily The Hindu BusinessLine published Monday, RBI Governor Sanjay Malhotra said that till date, banks have mobilised almost $32 billion through the measures announced last month to shore up foreign capital inflows. This is much more than market participants' expectations, with banks that have received these inflows hedging them by receiving fixed rate contracts in swaps, dealers said.

Some traders also unwound their reverse bond swap trades due to the fall in swap rates, while some preferred to hold on to these bets, dealers said. The five-year OIS rate fell below the yield of the five-year benchmark 6.36%, 2031 bond Monday, after rising last week. The 2031 bond yield ended at 6.43%, while the five-year swap ended at 6.36%. However, the fall in rates was capped, with the five-year swap nearing a technical level, dealers said. After steepening last week, the swap rate curve flattened Monday, with pricing of rate hikes largely unchanged from last week in the one-year swap rate, they said. The one-year swap rate is pricing in roughly more than three repo rate hikes within 12 months. While banks' asset and liability managers have been receiving fixed rates, some traders hold paid positions in swaps as the outlook on swap rates is an upward rise due to inflation seen above the RBI's target, while gilt yields could fall if India is included in Bloomberg's Global Aggregate bond index. 

"After falling to 6.35%, most of the day it (5-year OIS) traded there itself, within two bps," a dealer at a state-owned bank said. "It's a Fibonacci level (on the technical charts), the 100-day, 50-day moving averages are around 6.36-6.37%."

The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform fell to INR 542.50 billion from INR 620.10 billion Friday.

OUTLOOK

Tuesday, swap rates are seen tracking near-month Brent crude oil prices and US Treasury yields, with swaps likely to open higher as Brent rose back above $90 per barrel after market hours, dealers said. If Brent crude prices ease to about $80 per barrel or lower, the five-year swap rate could hit the key technical level of 6.25%, they said. Swap traders also await the outcome of the meeting of the US Federal Open Market Committee Wednesday. Traders will also track the movement in government bond yields, especially the five-year bond, with close attention on its spread with the five-year swap rate.

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.

Receiving by foreign and private-sector banks hedging foreign currency non-resident (bank) deposits and traders conducting reverse bond swaps may cap any rise in swap rates. 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.

The movement of the rupee and overnight borrowing rates will also lend cues. The one-year swap rate is seen in the range of 5.85-6.20% and the five-year at 6.25-6.60%.

End

US$1 = INR 95.91

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

Edited by Rajeev Pai

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