The recent geopolitical tension in the West Asia has seen India’s overnight index swap (OIS) rates to rise sharply. The one-year OIS rose 24 bps to 5.72%, and five-year OIS jumped by 28 bps to 6.27% in March.
OIS is used by companies and banks to hedge against sudden volatility in short-term rates. It also signals expected interest rate shifts.
Earlier in the month, the one-year OIS climbed as high as 5.84%, with 5-year rates jumping to 6.39% during the month—their highest since May 2022. Though it has come down by more than 10 bps on Wednesday from the previous close as oil prices eased, OIS remains elevated. Inflation fears are pressuring OIS rates upward.
Crude oil prices
The crude oil price touched a high of nearly $120 per barrel on March 9, after which it came down to $91.50 after hints of de-escalation of war.
“The increasing cost of oil poses an inflationary risk for many countries, prompting a rise in bond yields and expectations of interest rate hikes across several economies,” said Sameer Karyatt, executive director and head of trading at DBS Bank India.
He added that the combined effect of global yield movements and higher crude prices has had a more pronounced influence on OIS rates than on government bond yields,” Every $10 increase in the oil price may lead to 35-40 bps rise in inflation, according to a report by State Bank of India.
RBI’s buying in secondary markets
The RBI’s buying in secondary markets, along with bond purchases through open market operations (OMO) has provided key support to G-Secs, according to dealers. The yield on 10-year G-sec ended at 6.67%, almost flat in March.
According to V R C Reddy, treasury head at Karur Vysya Bank, OIS rates typically reflect changes in macroeconomic expectations and the anticipated path of policy rates.
He said that the prolonged conflict risks India’s growth-inflation-fiscal balance through higher crude and rupee pressure. The evolving Gulf crisis poses a potential risk to India’s goldilocks situation, Reddy added.