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Informist, Wednesday, Jul. 22, 2026

 

By Cassandra Carvalho

 

MUMBAI – Overnight indexed swap rates ended off highs Wednesday even as Brent crude oil prices rose intraday as domestic traders received fixed rate contracts, to hedge their bond purchases, while some traders received fixed rates to hedge inflows from foreign currency non-resident (bank) deposits, dealers said. Swap rates also have a larger scope for falling if the US and Iran agreed to a ceasefire again, since offshore funds have been aggressively paying fixed rates while domestic banks have been more active in buying government bonds, they said. 

 

The one-year swap rate closed at 6.00%, up from 5.97% Tuesday and off the day's high of 6.03%. The five-year swap rate ended at 6.48%, up from 6.44% Tuesday. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 649.30 billion Wednesday from INR 462.65 billion Tuesday. Brent crude oil futures for delivery in September rose to $94.61 per barrel at 1700 IST, from $92.01 per barrel at 0900 IST, and from $90.44 at 1700 IST Tuesday. The yield on the 10-year US Treasury note was 4.64% at 1700 IST, from 4.61% at the same time Tuesday.

 

"If there's a (US-Iran) truce, people will start cutting positions and the reaction (fall) in OIS will be very wild," a fund manager at an insurance company said. Swap rates have risen sharply since the US-Iran war recommenced, while bond yields have risen moderately as the outlook on demand for the latter is seen firm. 

 

Traders refrained from short-selling gilts even as oil prices topped $95 per barrel due to the possibility of Bloomberg including India in its flagship Global Aggregate Index, along with the outlook for inflows from foreign currency non-resident bank deposits seen firm; with expectations that some of these funds will be deployed in government bonds. They chose to, instead, hedge their bond purchases by paying fixed rates in swaps, dealers said. Offshore funds also paid fixed rates in swaps tracking a rise in oil prices. A rise in forward premiums also pushed up swap rates, they said. 

 

However, the rise in the five-year swap rate led to traders preferring to receive the non-funded instrument and sell five-year government bonds as the spread between the two instruments was flat, and likely to invert, dealers said. "The receiving in five-year (OIS) has already begun, past few days we've seen the spread at 3 bps, then 2 bps, today (Wednesday) we're at zero and we also saw minus one," a dealer at a primary dealership said. 

 

OUTLOOK

On Thursday, swap rates will track movements in crude oil prices and Indian government bond yields, dealers said. Receiving by foreign banks receiving FCNR(B) deposits and traders conducting reverse bond swaps may cap any rise in swap rates. Offshore traders are likely to continue paying fixed-rate contracts if the conflict in West Asia persists. Unless there is significant escalation in the war, views on domestic rate increases due to the potential impact on imported inflation are little changed, with greater concern on the depreciation of the rupee.

 

The one-year swap rate is roughly pricing in nearly three repo rate hikes within 12 months. Traders expect received flows from domestic banks' asset and liability management desks to step up if the five-year OIS rises to around 6.70%. Traders have mixed views on the trajectory of the swap rate curve, with some expecting the curve to steepen – wherein longer-term swap rates rise faster than short-term ones as foreign inflows received through the various schemes are robust and keep short-term rates anchored due to the liquidity boost. Traders expect flows totalling around $40 billion by the first week of August. However, current liquidity tightness is adding to an upward pressure on rates, dealers said. The overnight Mumbai Interbank Outright Rate has not been set below the repo rate since May 18.

 

A further rise in crude oil prices could put upward pressure on short-term rates as well, as rate hikes by the RBI's Monetary Policy Committee become more imminent. The one-year swap rate is seen in the range of 5.80-6.20% and the five-year at 6.30-6.56%.

 

	At 1700 IST	TUESDAY
1-year OIS	6.00%	5.97%
2-year OIS	6.18%	6.14%
5-year OIS	6.48%	6.44%
2-year MIFOR	6.96%	6.91%
5-year MIFOR	7.14%	7.10%

 

End

 

US$1 = INR 96.5650

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

 

Edited by Deepshikha Bhardwaj

 

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