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Informist, Monday, Aug. 17, 2026

 

--India's 1-year OIS rises nearly 6 bps Mon, most in a day since Jul 14

--India's 5-year OIS rises over 9 bps Mon, most in a day since Jul 14 

 

By Aaryan Khanna
 

NEW DELHI – Overnight indexed swap rates ended higher after the Reserve Bank of India announced a premature end to its special swap facility for foreign currency non-resident (banks) deposit scheme, dealers said. An intraday rise in oil prices also put pressure on rates in the second half of the session, even as the domestic interest rate view remained unchanged. 

 

The one-year swap rate closed at 5.79%, up from 5.73% Friday. The five-year swap rate settled at 6.34%, rising sharply from 6.25% Friday. The rise in both benchmark contracts was the highest since Jul. 14. Total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform more than doubled to nearly INR 600 billion Monday from INR 263.65 billion Friday.

 

Friday, post-market hours, the RBI said that the concessional swap facility for foreign currency non-resident (banks) deposits would be available only for deposits mobilised till Aug. 31. The scheme was earlier scheduled to end on Sept. 30. Foreign and private-sector banks had been receiving fixed rates in the three-to-five-year tenures as it matched the deposits being accrued under the scheme.

 

With the early end, traders who had bet on these flows continuing over the six weeks took profit on their received fixed-rate positions, while others paid fixed as the scope of the inflows reduced, dealers said. Confidence in receiving fixed rates had only increased after RBI Governor Sanjay Malhotra said on Aug. 5 that there was no proposal to either end the scheme prematurely or extend it. Traders now expect FCNR(B) deposit accruals to total between $75 billion and $80 billion by August-end, against the earlier view of over $100 billion by September, they said. 

 

"Obviously, it is a bit abrupt from the RBI in terms of communication and that's why the market has reacted," a dealer at a private-sector bank said. "There had been a lot of front-running in bonds and OIS, as banks wanted to make sure they would get a relatively better return, and then hopefully their flows would be able to catch up by September. Now the RBI has erased that trade."

 

The move was also considered negative for near-term swap rates as traders reassessed the overnight Mumbai Interbank Outright Rate fixings over the next few months, dealers said. With the special scheme in effect, the overnight MIBOR rate – the fixed leg of the OIS contract – was expected to be set at or below the RBI's repo rate of 5.25% until the end of 2026 due to the surplus rupee liquidity until and after September. RBI Governor Malhotra had also said that durable measures to absorb liquidity would not be required.

 

Now, traders fear that the central bank could begin tightening its monetary policy in October as inflation rises heading into the festival season while growth holds up. One reason dealers attributed to the RBI ending the scheme early was that the rupee liquidity it generated may have been larger than the central bank bargained for. Swap rates do not reflect an October rate hike yet but the one-year rate still prices in the current policy rate to increase by 50 basis points by June, dealers said.

 

Consistently higher crude oil prices are putting pressure on the RBI's Monetary Policy Committee to raise rates, even as growth is expected to be resilient. Brent crude for October delivery was at $89.08 per barrel at 1700 IST Monday, up from $87.20 per barrel at the same time Friday. The RBI projects CPI inflation to average 4.7% in the September quarter and 5.9% in the December quarter, above its medium-term target of 4% and approaching the higher end of its 2-6% target band.

 

"Crude is not doing up any favours, but it has been between $85-$90 (per barrel) for almost two weeks now," a dealer at a primary dealership said. "Although the headline is different today – all about the FCNR(B) scheme – the reality is that the offshore side will continue paying (fixed rates) as long as oil prices continue being at these levels. And now we don't even have a domestic counterbalance."

 

OUTLOOK

On Tuesday, swap rates are expected to take cues from movements in crude oil prices and US Treasury yields following developments in the West Asia war overnight, dealers said. After a sharp rise Monday due to the RBI's announcement of an early closure to the special FCNR(B) scheme, traders do not expect OIS rates to rise further based on that trigger, they said. 

 

Elevated crude oil prices and US Treasury yields are a concern for traders as it may prompt the RBI's MPC to hike rates. The movement of the rupee and overnight borrowing rates will also lend cues. If global cues turn adverse, the five-year OIS may once again top 6.40%, as the scope to receive fixed rates from domestic traders will be lower with the scheme ending sooner, dealers said. 

 

Traders had expected foreign inflows to top $100 billion, with FCNR(B) deposits leading the inflows, and thus expected ample durable liquidity in the banking system. That expectation has now been trimmed, dealers said. Several banks had plans in place to raise such deposits through leveraging in September.

 

Some traders are also looking ahead to the release of the minutes of the US and India monetary policy decisions. Bets on a US rate hike at the next rate decision in September have faded over the past three weeks, while traders continue to expect MPC members to remain sanguine on inflation. Both releases are due after market hours Wednesday. On Tuesday, the one-year swap rate is seen in the range of 5.65-6.00% and the five-year at 6.20-6.42%.

 

	At 1700 IST	THURSDAY
1-year OIS	5.79%	5.73%
2-year OIS	6.00%	5.92%
5-year OIS	6.34%	6.25%
2-year MIFOR	6.78%	6.73%
5-year MIFOR	6.96%	6.91%

 

End

 

US$1 = INR 95.60

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

 

Edited by Saji George Titus

 

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