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Informist, Thursday, Jun. 25, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended off lows Thursday as traders took advantage of a sharp fall in rates this week to pay fixed rates at levels seen as lucrative, dealers said. An overnight fall in US Treasury yields and continued easing in Brent crude prices pulled down swap rates.

 

The one-year swap rate closed at 5.76% Thursday against 5.78% Wednesday, after falling to an over three-month low of 5.70% in early trade. The five-year swap rate ended at 6.18%, unchanged from Wednesday, but down from an intraday low of 6.14%. At the day's lows, the one-day swap rate was down 19 basis points from the close on Jun. 19, while the five-year swap rate was down 20 bps. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform fell sharply to INR 327.35 billion from INR 690.00 billion Wednesday.

 

"US yields have fallen 7-8 basis points overnight, but domestic swaps have not moved," a dealer at a primary dealership said. "It shows that there is fatigue on the receiving side since we had run ahead of this move after the governor's comments." The 10-year US Treasury yield fell to 4.39% intraday and was at 4.41% at 1700 IST, down from 4.49% at the same time Wednesday. 

 

In an interview with television channel ET Now Wednesday, RBI Governor Sanjay Malhotra said it was premature to talk about repo rate hikes by the Monetary Policy Committee in the coming months and said policymakers had taken a conscious decision not to signal rate hikes by keeping the policy stance at 'neutral' at the June monetary policy review.

 

The RBI also remained unsure about the second-round inflationary impact of the war in West Asia, with the top official calling the rise in prices from the hit to crude oil supply as "one-time." This erased fears of a repo rate hike in August and weakened bets on a rate increase in the October MPC meeting to negligible levels as well, leading to a sharp fall in swap rates Wednesday. In early trade Thursday, a further decline in crude oil prices pulled down rates. Brent crude futures for August delivery fell to near $72 per barrel Thursday, similar to the level before the war in West Asia began on Feb. 28. 

 

In the five-year OIS rate, traders unwound their received fixed rate bets in the 6.12-6.15% range at a profit. It would be difficult for the five-year swap rate to fall below this level after sliding over 40 bps this month, dealers said. Moreover, the 6.12% level is a 100-day moving average of the five-year OIS rate and will serve as technical support, they said.

 

However, other traders were of the view that the five-year OIS rate would fall to as low as 6.00% if US yields also decline after the truce between the US and Iran and in line with falling crude oil prices. As for the one-year swap rate – a bellwether of near-term domestic rate expectations – traders said that a notable decline will only come if large offshore flows come to receive OIS rates, which are unlikely immediately, as the risk of a rate hike later in 2026-27 (Apr-Mar) remains. 

 

"Things are shaping up nicely for OIS. People have made a lot of money on this trade," a dealer at a private-sector bank said. "But here on we are approaching a bottom where no rate hikes will be reflected in OIS and traders will want to have some insurance in case things go wrong."

 

OUTLOOK

Money markets are closed on Friday for Muharram. OIS rates are not traded on Saturdays. Swap rates may open steady Monday after the tumble in OIS rates this week on easing concern over rate hikes in India. Though most traders still see a base case of a 50 bps repo rate increase in India in FY27, RBI comments and the continued fall in crude oil prices suggest the Monetary Policy Committee may forgo material policy tightening, dealers said.

 

A likely liquidity boost from the RBI's measures to attract foreign capital is seen adding to the fall in short-term rates, but the central bank is also likely to drain this liquidity starting in July, dealers said. Another positive is the likely inflow of 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.

 

Deficient rainfall and higher food prices are expected to push up retail inflation in the coming months. Even though most traders no longer expect a repo rate hike in August or October, they are wary of a US Federal Open Market Committee rate hike sharply changing expectations for domestic rates, dealers said. Swap rates are seen rising in the medium term as domestic inflation is likely to increase due to a weak monsoon and crude oil supply disruptions, dealers said.

 

The movement of the rupee and US Treasury yields could also lend cues. The one-year swap rate is seen at 5.68-5.90% and the five-year at 6.05-6.30%.

 

	At 1700 IST	WEDNESDAY
1-year OIS	5.76%	5.78%
2-year OIS	5.91%	5.91%
5-year OIS	6.18%	6.18%
2-year MIFOR	6.73%	6.75%
5-year MIFOR	6.94%	6.96%

 

End

 

US$1 = INR 94.40

 

Edited by Saji George Titus

 

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