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Informist, Tuesday, Jul. 14, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended at their highest in a month, tracking a sharp rise in crude oil prices as the conflict in West Asia escalated, dealers said. Traders feared the Reserve Bank of India's Monetary Policy Committee would raise interest rates sooner than expected and placed bets on a hiking cycle starting in October rather than in December.

 

The one-year swap rate closed at 5.94%, up from 5.83% Monday, marking its biggest single-day rise since May 21. The five-year swap rate ended at 6.37%, up from 6.24% Monday, the highest it has risen in a single day since May 18. The one- and five-year swap rates ended at their highest level since Jun. 15 and Jun. 11, respectively.

 

Though the one-year swap rate is the bellwether of near-term interest rate expectations, the five-year rate was more volatile and sensitive to the rise in crude oil prices. The contract opened the day at 6.31%, triggering stop-losses for offshore traders and foreign banks on their received positions in the five-year OIS. The five-year rate had closed below the psychologically crucial level of 6.25% Monday and traders had set stop-losses on received bets in the 6.28-6.30?nd, dealers said. These entities had been receiving heavily last week, as banks received inflows from foreign-currency non-resident deposits, they said.

 

"Everyone who has received has been badly hit with crude going back to $85 (per barrel)," a dealer at a private-sector bank said. "Domestic, offshore, banks, mutual funds, everyone had a level which was triggered today (Tuesday) if they were on the wrong side."

 

Near-month Brent crude futures rose to $87.55 a barrel during Indian market hours, the highest in a month, after Iran and the US continued to strike each other over the past week. The bombing from the US has increased in intensity over the past two days, targeting several areas in Iran's south and west. Meanwhile, Tehran has targeted US assets in West Asia. Both sides have proclaimed themselves guardians of the Strait of Hormuz and cited breaches of the Memorandum of Understanding they signed in June as a reason for the attacks. At 1700 IST Tuesday, Brent crude futures for September delivery were $86.12 per barrel, up nearly 10% from the same time Monday.

 

Traders did not immediately expect second-round effects, such as an increase in CPI inflation, due to the recent flare-up in hostilities across West Asia, but were of the view that swap rates did not adequately reflect near-term risks of rate hikes. OIS contracts maturing in three to nine months rose by 5-9 bps to better reflect an October rate hike, which had been priced out until last week, following the ceasefire in West Asia and RBI Governor Sanjay Malhotra's comments that talk of rate hikes was premature.

 

OIS rates still did not indicate a significant chance of an August rate hike, dealers said. However, should the conflict between the US and Iran continue at the current pace, traders widely expect central bank officials and the MPC to set the stage for an increase in the policy rate at its next meeting.

 

With the intensity of attacks between the US and Iran rising over the past 10 days, traders also fear that Brent crude futures may rise further from the current $85 a barrel. The likely slowdown in traffic through the Strait of Hormuz may again push up prices of key imported commodities for India, potentially increasing the government's subsidy burden or raising prices, dealers said. Wholesale price inflation rose to 9.87% in June from 9.68% in May, the highest in the new series, with the base year 2022-23 (Apr-Mar).

 

"In my view, even August should be a live policy (for a potential rate increase)," a dealer at a primary dealership said. "Right now, the activity is being driven by positioning in the five-year swap rate, but there should be a flattening of the curve as the market prices in October fully and considers August as an opportune time to hike rates if the RBI wants to get ahead of the curve."

 

OUTLOOK

On Wednesday, OIS rates will take cues from movements in crude oil prices and US Treasury yields, dealers said. The developments in West Asia may also influence traders' views on domestic rate increases due to the potential impact on imported inflation, they said. 

 

The last CPI inflation reading before the MPC's August meeting was in line with expectations but showed price pressures building and likely to increase in the coming months, dealers said. CPI inflation rose to 4.38% in June from 3.93% in May. With food and fuel prices driving retail inflation higher and military escalation in West Asia, traders now expect the MPC to hike the repo rate in October.

 

Deficient rainfall and higher food prices may push up retail inflation in the coming months, while the RBI is likely to drain systemic liquidity ahead of a likely rate hike cycle, dealers said. The RBI projects CPI inflation to average 5.9% in Oct-Dec, higher than the policy rate of 5.25%. The view of rate increase in India is influenced by the expectation that the US Federal Open Market Committee may also hike rates in 2026, dealers said. 

 

Traders await Bloomberg's decision on the inclusion of Indian gilts in its flagship index, with most traders betting on a favourable decision. Traders also expect overnight rates to ease due to a liquidity boost from inflows into foreign-currency non-resident bank deposits. The Bloomberg announcement on the inclusion of Indian bonds is expected any time between this week and September, dealers said. 

 

The movement in the rupee could also lend cues. The one-year swap rate is seen in the range of 5.78-6.05% and the five-year at 6.18-6.45%. 

 

	At 1700 IST	MONDAY
1-year OIS	5.94%	5.83%
2-year OIS	6.11%	5.97%
5-year OIS	6.37%	6.24%
2-year MIFOR	6.89%	6.80%
5-year MIFOR	7.08%	6.99%

 

End

 

US$1 = INR 96.20

 

Edited by Saji George Titus

 

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