OIS rates fall as US Fed seen the end of interest rate hike cycle

Overnight indexed swap (OIS) rates, which are the primary instruments for hedging interest rate risk in India, have plunged over the last six trading sessions.

This comes as the US June inflation data provided a glimmer of hope that the Federal Reserve may lean towards a patient and observant approach after the anticipated interest rate hike in the forthcoming policy review on July 26.

OIS rates act as an indicator of how the Reserve Bank of India (RBI) may act on policy rates. The one-year swap rate settled at 6.74 per cent, while the five-year swap rate settled at 6.22 per cent on Monday. The one-year and five-year swap rates have declined by 22 and 8 basis points, respectively, since July 10. 

Some traders unwound their paid fixed bets in the five-year segment in order to minimise their losses amid continuous fall in US treasury yields. Meanwhile, the fall in one-year swap rate was limited as the domestic rate view remains fairly unchanged.

“There was both onshore and off-shore receiving in the five-year segment,” a dealer at a primary dealership said.

He added, “Domestically, we are certain that the pause will continue in the current calendar year. However, now the rate cut expectations have shifted to January.”

Earlier, traders were expecting the central bank to cut the repo rate, starting February.