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Informist, Wednesday, Sept. 2, 2026

 

By Aaryan Khanna

 

NEW DELHI – Overnight indexed swap rates ended on a mixed note Wednesday. Short-term swap rates fell slightly while rates on swap contracts of two years and more inched up, though even these contracts ended off highs. A sharp rise in US Treasury yields and crude oil prices led to paying pressure through the day, though an intraday fall near the end of trading helped ease swap rates, dealers said.

 

The one-year swap rate ended at 6.00%, down from 6.02% Tuesday. The five-year swap rate ended at 6.53%, its highest closing level since Jun. 8. It had risen to as much as 6.57% intraday from 6.51% at the previous close. The total notional trading volume on Clearing Corp. of India Ltd.'s derivatives trading platform surged to INR 597.00 billion from INR 375.95 billion Tuesday.

 

The 10-year US Treasury yield hit a nearly three-year high of 4.82% during the day amid fears of US rate hikes and large borrowing. Meanwhile, Brent crude futures for November delivery surged above $95 per barrel for the first time in a month as the US and Iran traded strikes in a continuation of the war in West Asia. However, the crude contract fell to near $94 a barrel by 1700 IST and the 10-year US yield also inched lower to 4.80%.

 

"The entire problem is coming from the global side that is leading to all sorts of rate pricing in India," a dealer at a primary dealership said. "Everyone was in pay mode in the morning when crude rose and UST (US Treasury yields) moved up (over) 4.80%. At that time there was probably some position cutting around 55 levels (6.55% on the five-year OIS) and finally Brent only fell from the earlier levels, so that calmed down the market."

 

Several traders who had paid fixed rates around 6.34% on the five-year swap rate took profits at the day's high, unwinding prior positions, dealers said. Traders still refrained from receiving fixed rates afresh due to heavy offshore paying pressure as long as the war in West Asia continues, they said. 

 

Despite ending slightly lower, the one-year swap rate continued to price in over 100 basis points of repo rate hikes from the current 5.25% in the next year. Recent commentary from the Reserve Bank of India's Monetary Policy Committee suggested rate hikes may be in the offing if oil prices remain high, dealers said. Moreover, signs of broadening inflation are likely to emerge by the time the rate-setting panel meets in October, they said. The US Federal Open Market Committee's policy rate decision later this month is also seen as crucial for how quickly domestic rates rise, with the majority expecting the US rate-setting panel to hike its policy rate. 

 

However, a sharp fall in the overnight Mumbai Interbank Outright Rate -- the floating leg of the OIS contract -- led to an increase in volumes in the one-month swap contract. The overnight fixing was set at 5.08%, the lowest since Feb. 13. The notional traded volume in the one-month contract jumped to INR 71.50 billion Wednesday from INR 2.00 billion Tuesday. An onshore bank or primary dealership likely received a large amount expecting overnight fixings to remain well below the policy repo rate over the next month after the jump in liquidity this week, dealers said.

 

The RBI's net liquidity absorbed, an indicator of the banking system's liquidity surplus, rose to INR 7.76 trillion Tuesday, an over four-year high. It may top INR 10 trillion in the coming week as banks swap foreign currency non-resident (banks) deposits with the RBI under the special scheme.

 

"The one-month saw chunky receiving which was because MIBOR was in freefall. Now the pricing for even rate hikes up to three months will be skewed if overnight fixings come down this sharply," a dealer at a private-sector bank said.

 

OUTLOOK

On Thursday, swap rates may fall after the RBI released data showing FCNR(B) inflows were sharply higher than expected, which may lead to traders expecting heavy receiving interest from domestic banks in swap rates over the coming days, dealers said. In data released after market hours Wednesday, the RBI said FCNR(B) deposits under its special scheme were $127.23 billion between Jun. 8 and Aug. 31, against the maximum expectation of a little over $100 billion.

 

On the domestic front, traders will watch the RBI's management of surplus liquidity in the banking system, dealers said. Traders will also track the movement in crude oil prices and US Treasury yields, along with fresh developments in the US-Iran war. This may lead to a divergence in the direction of short-term and longer-term OIS rates, dealers said.

 

Liquidity is expected to continue to rise this week as banks swap the remaining FCNR(B) inflows under the special facility while expectations that the RBI will introduce measures to drain durable liquidity, including incremental hikes in the cash reserve ratio or a market stabilisation scheme, are gaining traction, dealers said. Such a hike in the CRR would set the stage for a repo rate hike at the next policy meeting, some dealers said. Others said ensuring that the weighted average call money rate is near the repo rate need not signify the movement of interest rates.

 

The one-year swap rate continues to reflect around 100 basis points of repo rate hikes over the next 12 months, dealers said. The one-year swap rate is seen Thursday in the range of 5.82-6.10% and the five-year at 6.35-6.65%.

 

	At 1700 IST	TUESDAY
1-year OIS	6.00%	6.02%
2-year OIS	6.22%	6.21%
5-year OIS	6.53%	6.51%
2-year MIFOR	7.13%	7.08%
5-year MIFOR	7.24%	7.20%

 

End

 

US$1 = INR 94.9700

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

 

Edited by Saji George Titus and Rajeev Pai

 

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