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Informist, Thursday, Jun. 18, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates inched up Thursday after falling for five straight sessions, tracking a rise in US Treasury yields. The US Federal Open Market Committee late Wednesday held its policy rate as expected but commentary suggested rate hikes were likely in the coming months to combat higher inflation, dealers said. 

The one-year swap rate closed at 5.89% Thursday from 5.88% Wednesday. The five-year swap rate ended at 6.32%, up from 6.30% the previous day. Wednesday's levels were over one-month closing lows for both the benchmark swap rates. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 544.80 billion Thursday, similar to INR 546.70 billion Wednesday.

The US FOMC's statement was shorter than previous meetings but suggested an increased focus on curbing inflationary pressures arising from the war in West Asia, with comfort on the growth and employment front. The Summary of Economic Projections released along with the committee's statement showed an even split between US Federal Reserve officials who see the policy rate at current levels or lower by the end of 2026 and those who see rate hikes.

The median view on the policy rate at the end of 2026 rose to 3.8% from 3.4% in March, with inflation forecasts for the December quarter also rising sharply. The 10-year US Treasury yield rose to 4.46% at the end of Indian market hours Thursday from 4.44%, while the two-year US Treasury yield surged to 4.21% from 4.06% the previous day. 

"Indian markets are cutting down rate hikes (pricing) while US rates are beginning to price in 25-50 basis (points) of rate hikes, the two-year rates are up 20 basis points," a dealer at a foreign bank said. "Other Asian economies are hiking. In such a scenario eventually swap rates are going to fly." 

Offshore traders paid fixed rates across tenures through the day, dealers said. Bank Indonesia's decision to hike its policy rate on Thursday for the third time in a month reiterated the view that the Reserve Bank of India's Monetary Policy Committee would have to hike the repo rate later in the year, despite the higher bar for rate hikes that the panel indicated in the June policy review, dealers said. Swap rates are still pricing in 50-75 basis points of repo rate hikes from the current 5.25% by April, dealers said. 

OIS rates had fallen in early trade after the US and Iran signed a memorandum of understanding with guarantees on immediately allowing free passage through the vital Strait of Hormuz. This cemented the end of the war and fears of higher imported inflation, as well as concerns that the peace deal would not hold, dealers said. Brent crude oil futures for August delivery were at $78.67 a barrel at 1700 IST, down from $79.24 at the close of Indian gilt market hours on Wednesday.

"The passthrough in the US is much quicker, so the hawkishness will fade in a month or two there, once pump prices come down since crude is falling," a dealer at a primary dealership said. "So there looks to be some room to play in the short-term rates, where pricing can shift down to 50 bps of rate hikes from 75 bps right now. I would be very suprised if at least 50 bps of rate hikes don't take place in India."

OUTLOOK

Swap rates are seen opening steady Friday on caution ahead of the release of the minutes of the MPC's June meeting. The impact of offshore cues may be limited during the day since significant fall in crude prices is not expected after near-month Brent futures have sustained below $80 per barrel for two days. 

Traders do not expect a sharp change in their rate view after the minutes are released. However, the stance of individual members on hiking rates to protect the rupee will be closely tracked. The six-member MPC unanimously held the policy repo rate at 5.25% and retained its neutral stance in the Jun. 5 policy decision.

Swap rates may fall if there is an uptick in non-resident dollar-denominated bank deposits of three- to five-year tenures. This will likely lead to demand for short-term bonds and banks may begin to unwind their paid fixed rate positions that were hedging against a fall in price of their bond holdings, dealers said. 

A likely liquidity boost due to the RBI's measures to shore up capital is seen adding to the fall in short-term rates, dealers said. Most traders now do not expect a repo rate hike in August, though concerns over deficient rainfall and higher food prices remain. The MPC may hike the repo rate in October, but a rate hike in the near term seems unlikely with the peace deal coming to fruition and May's CPI inflation lower than expected, they said.

Traders will also track any development on the inclusion of Indian government bonds on Bloomberg Index Services' flagship Global Aggregate Index after the RBI and the Centre unveiled a slew of measures to improve foreign inflows earlier this month, dealers said. Bloomberg, which deferred its decision on the inclusion of Indian bonds in January, said it plans to provide the next update on the potential inclusion by mid-2026. The decision is expected this month, dealers said. The movement of the rupee could also lend cues. The one-year swap rate is seen at 5.75-6.00% and the five-year at 6.20-6.42%.

End

US$1 = INR 94.33

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

Edited by Akul Nishant Akhoury

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