Foreign Investors Slash India Rate Hike Expectations as 5-Year Interest Rate Swap Volume Hits Record
Claire Weston
Foreign institutions unwound India rate-hike positions for a second straight day, pushing 5-year OIS volume to triple its daily average; the RBI's currency-support measures are reshaping monetary-policy expectations.
Why did swap volume suddenly explode?
India's 5-year overnight index swap (OIS — a derivative contract that bets on the future path of interest rates) traded ₹253 billion (~$2.65 billion) on Wednesday, topping Tuesday's ₹236 billion to set a second consecutive record.
That is roughly three times the daily average for this year. This means → it is not routine flow — a cluster of large positions is being liquidated at once.
Mandar Pitale, head of treasury at SBM Bank (India), said institutions had built up heavy long positions betting the RBI would "front-load" aggressive rate hikes. In plain terms = the crowd that bet on rapid tightening is now admitting the call was wrong and rushing for the exit.
How far have rate-hike expectations fallen?
The 5-year OIS rate fell to 6.1% on Tuesday, a 4-month low, just 10 basis points above its pre-Iran-war level.
At its April peak, the rate had climbed to roughly 6.9%, with markets pricing in as much as 125 basis points of hikes. This means → in a matter of weeks, the market has slashed the bulk of its tightening bets.
This reflects a directional shift in sentiment — from "the central bank must slam the brakes" to "the worst may already be over."
What triggered the reversal?
The Reserve Bank of India rolled out a package of measures last month to boost capital inflows and support the rupee. Markets promptly unwound their tightening bets.
The rupee had hit a record low of 96.96 per dollar on May 20 and has since recovered about 1.5%. HSBC strategist Duncan Tan noted that expectations of large-scale FX inflows have improved rupee sentiment.
In plain terms = the RBI stepped in to stabilize the currency → markets decided rate hikes were less urgent → positions that had bet on hikes became wrong-way trades and had to be closed.
Is the risk really off the table?
After President Trump declared the Iran ceasefire deal "terminated," the rupee came under pressure again — geopolitical shocks can interrupt the currency's stabilization at any time.
HSBC's Duncan Tan argues that expectations of large FX inflows have capped the risk of offshore OIS rates rising further on currency volatility — but that view depends on inflows actually materializing.
This means → the surge in swap volume is a signal that confidence is returning, but whether the rupee can hold steady through geopolitical shocks remains the key variable testing whether rate-hike expectations can keep converging.
Content is for reference only, not financial advice.