Foreign investors pare India rate-hike bets, fuel record 5-year swaps trading

A rush by foreign investors to unwind bets on interest rate hikes in India has pushed turnover in the country’s five-year overnight index swap market to a record high, signalling a return of market confidence.

Turnover in the five-year swap, a key gauge of policy rate expectations, jumped to a record 253 billion rupees ($2.65 billion) on Wednesday, breaking past 236 billion rupee notional contracts clocked on Tuesday. The volume is nearly three times the average daily volume so far this year.

Some market participants had accumulated sizeable positions for a series of ”front-loaded” rate hikes in quick succession on concerns over inflation and rupee weakness, Mandar Pitale, head of treasury at SBM Bank (India), said.

Those positions are being unwound aggressively, he said.

On Tuesday, India’s five-year OIS fell to a four-month low of 6.1%, only 10 basis points above where it was before the start of the Iran war.

The key rate had climbed to about 6.9% in April, with investors factoring in up to 125 basis points of rate increases.

These expectations have since been pared significantly as the Reserve Bank of India last month unveiled a series of measures to boost inflows and support the rupee, prompting a scaling back of bets that it would tighten monetary policy to defend the currency.

The rupee, which fell to a record low of 96.96 per dollar on May 20, has risen 1.5% since then, though it has come under renewed pressure after US President Donald Trump said the ceasefire with Iran was ”over”.

Expectations of sizeable foreign-exchange inflows have improved sentiment toward the rupee, limiting the risk that currency volatility could push offshore OIS rates higher, Duncan Tan, APAC rates strategist at HSBC, said in a note on Wednesday.

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($1 = 95.5750 Indian rupees)