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Informist, Thursday, Aug. 20, 2026

 

--India's 1-year OIS rises 13 bps Thu, most in a day since May 21 

 

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended at the day's high Thursday owing to a late rise in crude oil prices and US Treasury yields, though the surge was largely driven by a domestic reassessment of interest rate hikes, dealers said. Traders brought forward their expectations of the Reserve Bank of India's Monetary Policy Committee raising interest rates in the financial year ending March after the release of the August meeting's minutes Wednesday.

 

The one-year swap rate closed at 5.94% Thursday from 5.81% Wednesday, the sharpest single-day rise since May 21. The five-year swap rate settled at 6.48%, up from 6.40% the previous day. Both benchmark rates ended at their highest levels since Jul. 24. The total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform surged to INR 846.90 billion from INR 406.00 trillion Wednesday.

 

The minutes showed the six-member committee was more concerned about the upcoming rise in retail inflation than RBI Governor Sanjay Malhotra let on in remarks after the rate decision on Aug. 5, dealers said. The panel had kept the repo unchanged at 5.25% and its policy stance at "neutral". Deputy Governor Poonam Gupta said "a case for a hike may emerge during the course of the year" in her minutes because headline inflation is projected at 5.9% in the December quarter. Malhotra himself noted that a calibration in the policy rate may be required as inflation rises in the second half of FY27. The one-year swap rate was pricing in between 50 and 75 basis points of rate increases heading into the release and now reflects nearly 100 bps of rate hikes in the next 12 months, potentially beginning as early as October, dealers said.

 

"Though it is more of a knee-jerk reaction, it is undeniable that the minutes were unexpectedly hawkish," a dealer at a foreign bank said. "Fortunately the market had already not believed the governor completely when he seemed to dismiss rate hikes, because now the pricing is back to 100 bps from 50 bps a week ago." So far this week, the one-year swap rate has risen over 20 bps.

 

However, fears of an October rate hike are not widespread and would depend heavily on factors such as the monsoon and the war in West Asia over the next six weeks, dealers said. Many members noted there were no signs of generalised inflation from a spike in food and fuel prices so far, which seemed to suggest a rate hike would be in December rather than October, they said.

 

Most of the market activity was domestic and concentrated in short-term swap rates as traders adjusted their positions on potential rate hikes, dealers said. A late rise in crude oil prices and US Treasury yields pushed up OIS rates further towards the end of the day, they said.

 

Brent crude for October delivery jumped to nearly $95 per barrel by the end of Indian market hours from around $92 per barrel at 1700 IST Wednesday as talks between the US and Iran to end the war in West Asia appeared to have broken down. A sustained rise in crude oil prices is expected to keep imported inflation high, which may in turn lead to domestic rate hikes, dealers said. In her minutes, Gupta said it would be better to assume India's crude oil basket price at $90 per barrel through the course of the year, rather than the $95 per-barrel assumption the RBI had made in June. 

 

The 10-year US Treasury yield had fallen overnight after the US government announced doubling the size of its buybacks of bonds maturing in 10-30 years, which had capped the rise in the five-year OIS rate at the open, dealers said. However, the yield rose intraday and was at 4.69% by 1700 IST Thursday, the same level as at the Indian market close Wednesday.

 

"At the margin, crude and US yields are continuing to drive rates higher," a dealer at a primary dealership said. "But I think the bigger point today was there was a significant flattening of the curve after what has taken place in the last few days, where hedge funds have driven the spread up." The spread of the five-year OIS rate over the one-year OIS rate fell to 54 bps Thursday from 59 bps Wednesday, after widening from 52 bps at the end of last week. 

 

OUTLOOK

Friday, swap rates are expected take cues from US Treasury yields and crude oil prices, especially from developments in the war in West Asia. The sharp rise in OIS rates so far this week may lead to some traders receiving fixed rates if there is no significant movement on the global front, dealers said.

 

India's swap rates are pricing in a 75-100 bp repo rate increase over the next 12 months starting in October. This is an extreme interpretation and not a widespread base case among traders, who largely expect an increase of 50-75 bps, dealers said. However, with inflation risks tilted to the upside, offshore traders may also pay fixed rates if the market does not price in at least 75 bps of rate increases, they said.

 

High crude oil prices continue to remain a concern for traders as they may prompt the RBI's Monetary Policy Committee to raise interest rates. The movement of the rupee and overnight borrowing rates will also lend cues. With the central bank's special foreign currency non-resident (banks) deposit scheme now ending Aug. 31 rather than Sept. 30, dealers do not expect onshore entities to heavily receive fixed rates even when they rise, with increased focus on overseas triggers.

 

Friday, the one-year swap rate is seen in the range of 5.70-6.00% and the five-year at 6.30-6.52%.

 

	At 1700 IST	WEDNESDAY
1-year OIS	5.94%	5.81%
2-year OIS	6.17%	6.05%
5-year OIS	6.48%	6.40%
2-year MIFOR	6.90%	6.85%
5-year MIFOR	7.07%	7.03%

 

End

 

US$1 = INR 95.70

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

 

Edited by Rajeev Pai

 

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