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Informist, Wednesday, Aug. 5, 2026

--India's 1-year OIS ends at 5.76% Wed, lowest closing level since Jul 7 

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates ended sharply lower Wednesday tracking a fall in Brent crude oil prices, but were little changed after Reserve Bank of India Governor Sanjay Malhotra's policy statement and post-policy press conference. The one-year OIS rate ended at its lowest since Jul. 7, while the five-year OIS rate ended at its lowest since Jul. 13. The spread between the two swaps was little changed from Tuesday at 49 basis points, but a steady increase from about 40 bps a month ago. 

The one-year swap rate closed at 5.76%, down from 5.87% Tuesday. The one-year OIS fell 11 bps Wednesday, the most in a day since May 25. The five-year swap rate ended at 6.25%, also down from 6.36% the previous session. 

Swaps traded sharply lower in early trade tracking an overnight fall in Brent crude oil prices on hopes of a deal between the US and Iran on reopening free access to the Strait of Hormuz. Little of the fall in swaps Wednesday could be attributed to the Monetary Policy Committee's decision, dealers said. The MPC left the repo rate and policy stance unchanged at 5.25% and 'neutral' respectively, in line with traders' expectations.

Traders observed a sharp shift in RBI governor's commentary on inflation, which led to some pricing out of a hike in the repo rate by the rate-setting panel in October, dealers said. Malhotra signalled a larger focus on core inflation being much lower than 4% even as headline CPI inflation is seen above the 4% target in 2026-27 (Apr-Mar), dealers said. The RBI Wednesday lowered its FY27 CPI inflation target to 5.0% from 5.1% previously. Malhotra said that there was little sign of 'generalisation' of price pressures barring food and fuel. However, traders said a large fall in swap rates is unlikely since traders would step in to pay fixed rates to hedge other instruments, dealers said. Moreover, swaps would also track US Treasury yields, which are still pricing in rate hikes by the US Federal Open Market Committee in 2026. The MPC on the other hand, is seen as unlikely to hike rates unless the FOMC hikes rates, upon which the former would have to protect the interest rate differential between the two economies, dealers said. With the five-year benchmark gilt outperforming other tenures Wednesday, traders expect the gilt yield to fall more than the five-year OIS rate. The spread between the two was 6 bps Wednesday, the most in six sessions. 

"I don't think the 5x5 spread will widen any further, it will stay here or narrow because I don't think OIS will outperform," a trader at a primary dealership said. 

Brent crude oil futures for delivery in October fell to $80.46 per barrel at 1700 IST, from $83.54 at 1700 IST the previous day, though it rose intraday from $78.44 at 0900 IST Wednesday. The yield on the 10-year US Treasury note was 4.62% at 1700 IST, down from 4.69% at the same time Tuesday. The total notional trading volume reported on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 969.20 billion, higher than INR 698.55 billion Tuesday. Technical levels also prevented a further fall in OIS Wednesday and is likely to do so in the near term. The 5.75% level on the one-year OIS and the 6.21% level on the five-year OIS see strong paying interest deterring a fall below, dealers said. 

"It is going to be a twist. We will see some steepening up to two-year (OIS) but between 2 to 5-year (OIS) we will see flattening," a dealer at a private sector bank said. 

OUTLOOK

On Thursday, swap rates are seen opening largely steady but will track the overnight movement in crude oil prices. Unless crude prices ease close to $70 per barrel or lower, swaps are unlikely to fall significantly, even though traders are not expecting a hike in the repo rate at the MPC's October meeting, compared to some expectations before the policy outcome Wednesday. 

Swaps could trade in a sticky range as some domestic and foreign banks' asset and liability managers could step in to receive fixed rates, while some fund-raisers could receive rates to hedge their bond issuances if swap rates rise, dealers said. However, offshore traders could step up paying interest in swaps if crude oil prices remain elevated, dealers said. 

The view on the swap rate curve is still seen mixed, with expectations of both steepening or flattening. Short-term swaps could briefly inch up by around 3 to 4 basis points if the RBI begins conducting variable-rate reverse repo operations to drain excess surplus rupee liquidity, but traders do not expect the RBI to announce any measures to drain durable liquidity. Due to hefty inflows through foreign currency non-resident bank deposits, the shorter-end of the swap rate curve could be anchored due to the liquidity boost, while some traders may receive the longer-term swaps to deploy the flows. The movement of the rupee and overnight borrowing rates will also lend cues. The one-year swap rate is seen in the range of 5.65-6.10% and the five-year at 6.07-6.40%.

End

US$1 = INR 95.1175

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

Edited by Akul Nishant Akhoury

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