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Informist, Wednesday, Sept. 16, 2026

 

By Janwee Prajapati

 

MUMBAI – Overnight indexed swap rates ended slightly lower Wednesday, tracking a slight fall in US Treasury yields, dealers said. Trade volume stayed subdued as traders awaited the Federal Open Market Committee's decision on policy rates, dealers said. A rise in Brent crude oil prices also weighed on market sentiment, dealers said. 

 

Brent crude oil futures for November delivery were at $107.11 per barrel, up from $106.11 per barrel at the end of Indian trading hours Tuesday. The rise in Brent Crude oil weighed on market sentiment due to fears of an escalation in the war in West Asia, dealers said. The yield on the 10-year benchmark US Treasury was 4.98%, down from the 5% mark it hit Tuesday, which led to a slight fall in swap rates, dealers said.

 

"Volume is very less today (Wednesday) in the market," a dealer at a primary dealership said. "People are just waiting for the FOMC decision and some are unwinding their positions on caution ahead of the meeting." Traders refrained from building aggressive positions as they awaited the FOMC decision on policy rates, dealers said. Some traders who had paid fixed rates near 6.34–6.35% level on the five-year swap rate likely unwounded their positions, which pulled down swap rates, dealers said.

 

The one-year swap rate ended at 6.07%, down from 6.10% Tuesday. The five-year swap rate ended at 6.62%, against 6.66% Tuesday. Total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 276.25 billion Wednesday only about half of INR 536.40 billion on Tuesday. 

 

Traders expect the OIS curve to flatten as they expect a rate hike by the FOMC to nudge the Reserve Bank of India's Monetary Policy Committee to hike the repo rate as well. At the current level, the one-year OIS rate is pricing in four rate hikes, dealers said. However, the swap rate curve has yet to flatten, as the Mumbai Interbank Outright rate has been low due to excess liquidity in the banking system, dealers said. The RBI's net liquidity absorbed – a proxy for the banking system liquidity surplus – was INR 9.85 trillion Tuesday, down from INR 10.41 trillion Monday. Some traders likely received fixed rates at the shorter end of the OIS curve, which kept the short-term swap rates lower, dealers said. Some traders expected the one-year OIS rate to fall to 6%, while the five-year OIS rate is likely to fall to 6.61% if the FOMC does not hike rates at its meeting on Wednesday.

 

"The only way that offshore can continue to play for rate hikes is by paying the five-year, which is consistently being done through steepeners," a dealer at a foreign bank said, referring to a trade where one- or two-year swap rates are receiving while the five-year OIS is paid. "Even though the curve should flatten as we approach rate hikes, the opposite is happening since the overnight rates are so low."

 

Given excessive liquidity in the banking system, some traders expect the RBI to announce measures to absorb excess liquidity, in addition to the INR 1 trillion worth of bond sales through the open-market operations auction notice, dealers said. Some traders expect such measures to include a cash reserve ratio hike rather than another OMO auction. Traders expect such an announcement to come after the RBI's MPC meeting next month. Traders had expected the central bank to announce such measures, as they anticipated the RBI would absorb excess liquidity to facilitate smoother transmission of the rate hike.    
 

OUTLOOK

Thursday, swap rates are expected to track movements in US yields after the FOMC's decision on policy rates, dealers said. Traders will also track movement in oil prices. Dealers expect that if the Fed opts for a rate hike, the RBI's rate-setting panel will follow suit in October.

Alongside liquidity-draining measures from the RBI, such as OMO sales and variable rate reverse repo operations, traders also expect the RBI to conduct dollar-rupee sell-buy swaps in both the primary and secondary markets. 

 

As received bets linked to banks' inflows from foreign currency non-resident (banks) deposits stopped nearing the end of the deadline Friday to swap dollars under this scheme, swap rates may no longer be capped, dealers said. After the OMO sales announcement, bets that the swap rate curve would flatten and would take time to play out have been wiped out as the RBI begins draining liquidity. The one-year swap rate is seen in the range of 5.95-6.15% and the five-year at 6.40-6.70%.

 

	At 1700 IST	TUESDAY
1-year OIS	6.07%	6.10%
2-year OIS	6.30%	6.34%
5-year OIS	6.62%	6.66%
2-year MIFOR	7.63%	7.67%
5-year MIFOR	7.72%	7.76%

 

End

 

US$1 = INR 95.96

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

 

Edited by Saji George Titus

 

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