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Informist, Monday, Jun. 22, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended lower as the minutes of the Monetary Policy Committee's June meeting suggested the bar for policy rate hikes was significant and policymakers were not seen favouring a rate hike in August, dealers said. An intraday fall in crude prices also led to an additional leg down in swaps, while subdued activity from offshore traders kept trade volumes low. 

 

The one-year swap rate closed at 5.88% Monday from 5.90% Friday. The five-year swap rate ended at 6.30%, down from 6.34% the previous day. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 191.35 billion, sharply down from INR 452.05 billion Friday. The uncertainty over the peace talks between the US and Iran also contributed to lower volumes, dealers said.  

 

"The market seems to have gotten significant comfort from the minutes," a dealer at a private-sector bank said. "Crucially there were no negative surprises from any of the members or any strong inclination to hike rates sooner rather than later. They all seemed quite passive instead of being proactive on rates." 

 

The Reserve Bank of India's MPC preferred to adopt a "wait and watch" approach despite risk of higher inflation due to the war in West Asia, minutes of the rate-setting panel's June meeting released Friday showed. The committee, which met on Jun. 3-5, had left the repo rate unchanged at 5.25% and maintained the "neutral" policy stance.

 

Committee members said it was prudent to wait for greater clarity on the war in West Asia and the southwest monsoon before taking a call on raising interest rates, the minutes showed. Economists from Nomura and Barclays said after the minutes said that the rate-setting panel may not raise the policy repo rate of 5.25% in 2026, while State Bank of India also said in a research report that a rate hike were not warranted at this time. 

 

This reduced both the fear of a rate hike in the next policy review in August as well as the total quantum of rate increases that OIS rates were factoring in, dealers said. Despite the positive impact on the near-term rate view, some traders preferred receiving the five-year swap rate after its spread over the one-year swap rate fell by 7 basis points last week due to consistent paying pressure near the psychologically crucial 6.30% mark, which re-emerged Monday, they said.

 

Moreover, traders said that crude oil prices pesisting below the RBI's estimates may lower inflationary pressures in the economy and consequently weaken the case for rate hikes. The central bank's latest forecast of 5.1% average CPI inflation in 2026-27 (Apr-Mar) and a peak of 5.9% in the December quarter assumes the price of India's crude basket at $95 per barrel in the current financial year. India's crude oil basket was only at or above at the $95-per-barrel mark in two of the 11 trading sessions between Jun. 5 and Jun. 19. 

 

"At 5.90% (on the one-year swap rate), you are looking at August being a 50% chance (of a rate hike)," a dealer at a primary dealership said. "I don't think it is so straightforward since minutes show that they (MPC) will not pre-empt the inflation hump, at least not materially, so the hikes can only be priced October onwards provided nothing changes."

 

However, some dealers were of the view that a rate hike by the US Federal Reserve to counter rising inflation may push up domestic swap rates as well, especially with the recent fall over the past two weeks. A rise in US Treasury yields over the weekend did not have a significant impact on OIS rates due to the subdued activity from offshore traders, dealers said. Such an eventuality seemed unlikely with the memorandum of understanding between the US and Iran holding Brent crude futures for August delivery below $80 a barrel on Monday, during Indian market hours, dealers said. 

OUTLOOK

Swap rates are seen opening steady on Tuesday. Swap rates maturing in six months to one-year may ease as fears of domestic rate hikes diminished after the minutes of the June policy meeting, dealers said.

 

Short-term swap rates may remain under pressure this week due to a crunch in banking system liquidity, before picking up next week on the government's spending. System liquidity is expected to go into deficit in the coming days due to goods and services tax payment, which will keep overnight rates high, dealers said. 

 

A likely liquidity boost due to the RBI's measures to lure foreign capital is seen adding to the fall in short-term rates but at the same time, the central bank is likely to drain this liquidity starting in July ahead of a rate hike cycle, 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 raise the repo rate in October, especially if the US Fed begins raising rates, they said.

 

Swaps are seen rising in the medium term as domestic inflation is likely to rise due to the weak monsoon and supply disruptions in crude oil, dealers said. Swap rates may fall if there is an uptick in non-resident dollar-denominated bank deposits of three- to five-year tenors. This is likely to 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 the prices of their bond holdings, 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%.

 

	At 1700 IST	FRIDAY
1-year OIS	5.88%	5.90%
2-year OIS	6.02%	6.06%
5-year OIS	6.30%	6.34%
2-year MIFOR	6.90%	6.88%
5-year MIFOR	7.12%	7.11%

 

End

 

US$1 = INR 94.68

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

 

Edited by Akul Nishant Akhoury

 

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