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Informist, Wednesday, Aug. 19, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended steady with a significant drop in volumes from the previous session as an overnight fall in US Treasury yields offset the impact of higher crude oil prices, dealers said. Some traders were also cautious in placing large bets on interest rates ahead of the minutes of the August meeting of the Reserve Bank of India's Monetary Policy Committee and the July meeting of the US Federal Open Market Committee. Both minutes were scheduled for release after market hours Wednesday.

The one-year swap rate closed at 5.81% Wednesday, down from 5.83% Tuesday. The five-year swap rate settled at 6.40% from 6.42% the previous day. The total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform slumped to INR 406.00 billion from INR 1.02 trillion Tuesday.

The 10-year US Treasury note eased to 4.69% at the end of Indian market hours Wednesday from 4.74% at the same time Tuesday, easing after hitting a 19-month high. However, the continued increase in tensions between the US and Iran and the breakdown of talks between the two countries kept crude oil prices high. Brent crude futures for October delivery hovered around $92 a barrel at 1700 IST, up slightly from 1700 IST Tuesday. 

"I think US yields helped slightly, because there was really not the same kind of paying from the offshore side that we saw," a dealer at a private-sector bank said. "There is also some resistance around 6.45% (on the five-year swap rate), especially after the kind of rise we have seen this week." The one-year swap rate had risen 10 basis points and the five-year swap rate was up 17 bps in the two days to Tuesday.

Traders avoided aggressive bets on the outlook for domestic interest rates ahead of the Monetary Policy Committee's minutes. Market participants widely expected the minutes would show more concern on inflation than RBI Governor Sanjay Malhotra's remarks had let on in the post-policy press conference. The outlook on US interest rates after the US FOMC's comments may also lend cues to the domestic rate trajectory, dealers said. OIS rates are currently pricing in around 50 basis points of domestic rate hikes until June, from the current 5.25%.

"The minutes are coming up and they could have some impact. We are expecting at least some pushback on all the dovishness from the RBI," a dealer at a primary dealership said. "I don't think the RBI was too happy with the market reading his (Governor Malhotra's) comments as so dovish, especially since the war is continuing and inflation pressures are there."

Traders fear the RBI's rate-setting panel would have to hike interest rates in response to a potential interest rate hike by the US FOMC in 2026, though concern over such action has eased since the last US rate decision in July. With both the FOMC and the RBI's panel expected to delay hiking interest rates, based on most recent commentary, traders preferred to receive short-term swap rates while paying the five-year OIS rate, dealers said. 

OUTLOOK

Thursday, swap rates are expected to open on a mixed note. Swap rates maturing up to one year are seen rising after comments from the Monetary Policy Committee in the minutes suggested it may consider raising rates to curb inflationary pressures. This would bring forward rate hike expectations which were earlier subdued, pushing up short-term OIS rates, dealers said.

Meanwhile, the five-year swap rate is expected to open flat or lower tracking a sharp fall in the 10-year US Treasury yield after Indian market hours. Long-term US yields fell sharply after the US Treasury announced it would double the size of its buyback operations between September and November. The 10-year US yield fell to 4.64% at 2000 IST from 4.69% at 1700 IST.

"I believe on a headline level market may open flattish tomorrow, but OIS curve would flatten as shorter end would start worrying about rate hikes while longer end will look to US yields," a dealer at a foreign bank said. 

The minutes of the US FOMC's July meeting may also lend cues after they are released at 2330 IST. Thursday, the one-year swap rate is seen in the range of 5.70-6.00% and the five-year at 6.30-6.52%.

Higher crude oil prices continue to remain a concern for traders as they may prompt the RBI's Monetary Policy Committee to raise interest rates. The movement of the rupee and overnight borrowing rates will also lend cues. With the central bank's special foreign currency non-resident (banks) deposit scheme now ending Aug. 31 rather than Sept. 30, dealers do not expect onshore entities to heavily receive fixed rates even when they rise, with increased focus on overseas triggers.

End

US$1 = INR 95.75

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

Edited by Rajeev Pai

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