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Informist, Wednesday, Oct. 7, 2026

 

By Aaryan Khanna

 

MUMBAI – Overnight indexed swap rates were little changed by the Reserve Bank of India's Monetary Policy Committee hiking the policy repo rate by 25 basis points to 5.50%, which was widely expected. Instead, a change in the policy stance and higher crude oil prices and US Treasury yields pushed up swap rates maturing in two years and more, dealers said.

 

The one-year swap rate ended at 6.25%, against 6.24% Tuesday. The five-year OIS rate rose to 6.72% from 6.67% the previous day. The total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform was around INR 400 billion Wednesday, sharply lower than INR 598.25 billion Tuesday.

 

The MPC unanimously raised the repo rate but was split four-two in favour of a stance change to "calibrated tightening" from "neutral", which it had maintained since June last year. The stance change suggested at least two more rate hikes were coming, with further increases possible depending on the inflation trajectory, dealers said. The one-year OIS rate was already reflecting around 125 basis points of rate increases over the next year on Tuesday. 

 

However, traders said the stance was not changed to "restrictive", as some had feared. At the post-policy press conference, RBI Governor Sanjay Malhotra said that "calibrated" tightening refers to "minor" tightening, which to some dealers suggested the repo rate would not be increased beyond 6.00%. The RBI's projections showed CPI inflation averaging 5.8% in the next three quarters, peaking at 6.0% in the December quarter. This remains within the central bank's 2-6% comfort band but above the target of 4%. With crude oil prices remaining high and no end seen to the West Asia war, the beginning of the rate hike cycle still showed scope that the MPC may be forced to hike rates more than it is initially planning to, dealers said.

 

"The markets haven't moved, OIS is really not doing anything today. You look at the volumes also – it's just a normal day, not a policy day," a dealer at a foreign bank said. "He stuck to the right script and that is already priced into the market. Without a stance change, maybe the one-year OIS would have fallen, but right now people are holding onto their positions."

 

Dealers said the intraday rise in US yields and crude oil prices had a greater bearing on the movement in the five-year OIS rate, as well as the two-year rate, which saw offshore traders paying fixed rates through the day. With the "calibrated tightening" stance, some traders and analysts, including Madhavi Arora of Emkay Global Financial Services Ltd., expect the policy repo rate to be higher for longer, dealers said.

 

The yield on the 10-year US Treasury note rose to 5.34% by 1700 IST from 5.31% at 0900 IST and 5.27% at the close of Indian market hours Tuesday, approaching its two-decade highs. Meanwhile, Brent crude for December delivery rose to $102.10 a barrel from near $98 a barrel at 1700 IST Tuesday. The continuing war in West Asia and expectations of rate hikes by the US Federal Open Market Committee continued to put upward pressure on OIS rates, dealers said.

 

"People have already captured a terminal rate of around 6.50% in OIS and there does not seem to be anything in the policy which is pushing it up," a dealer at a primary dealership said. "It all depends on how oil pans out in the coming months."

 

On the other hand, some non-banking financial companies were receiving fixed rates to hedge the interest on their past and upcoming bond issuances, helping limit the rise in swap rates, dealers said. Bajaj Finance Ltd. was looking to raise INR 20 billion through the re-issue of its November 2029 bond Thursday. Bajaj Housing Finance Ltd. raised INR 18.85 billlion through the re-issue of its 2036 bond.

 

OUTLOOK

On Thursday, swap rates are likely to take cues from the overnight movement in crude oil prices and US Treasury yields and developments in the war in West Asia, dealers said. The RBI's comments on growth and inflation did not seem to suggest a pre-determined path for rate hikes but current crude oil and inflation readings made the case for at least two more repo rate increases, dealers said.

 

With swap rates already reflecting rate hikes of about 100 bps more from the current 5.50%, dealers do not expect short-term swap rates to rise further without a strong trigger, dealers said. The next domestic cue on OIS rates will be the CPI inflation print for September, set to be released Monday. 

 

Lack of liquidity-draining measures announced by the RBI along with the MPC release may also cap the upward rise in OIS rates as Mumbai Interbank Outright Rate fixings are likely to remain below the new repo rate of 5.50% for most of October, dealers said. The one-year swap rate is seen in the range of 5.95–6.35% and the five-year at 6.55–6.90%.

 

	At 1700 IST	TUESDAY
1-year OIS	6.25%	6.24%
2-year OIS	6.45%	6.41%
5-year OIS	6.72%	6.67%
2-year MIFOR	7.92%	7.81%
5-year MIFOR	7.94%	7.78%

 

End

 

US$1 = INR 96.78

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

 

Edited by Avishek Dutta

 

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