Key facts
- Foreign investors are unwinding bets on Indian interest rate hikes.
- This has led to record turnover in India's five-year overnight index swap market.
- Turnover reached 253 billion rupees ($2.65 billion) on Wednesday.
- The Reserve Bank of India implemented measures to boost inflows and support the rupee.
- The Indian rupee has strengthened by 1.5% since its recent low.
Foreign investors have significantly reduced their positions anticipating interest rate hikes in India, leading to a record high in trading volume for the country's five-year overnight index swap market. This shift signals a renewed confidence in the market.
Turnover in the five-year swap, a key indicator of policy rate expectations, surged to 253 billion rupees ($2.65 billion) on Wednesday, surpassing the previous day's 236 billion rupees. This volume is nearly triple the average daily volume seen this year.
Market participants had previously built substantial positions expecting a series of rapid rate hikes due to concerns over inflation and the weakening rupee. However, these positions are now being unwound aggressively, according to Mandar Pitale, head of treasury at SBM Bank (India).
On Tuesday, India's five-year OIS dropped to a four-month low of 6.1%, just 10 basis points above its level before the Iran war began. The key rate had previously peaked around 6.9% in April, with investors factoring in up to 125 basis points of increases.
These expectations have diminished considerably after the Reserve Bank of India introduced measures last month to attract foreign exchange inflows and support the rupee. This has led to a scaling back of bets on monetary policy tightening.
The Indian rupee, which had hit a record low of 96.96 per dollar on May 20, has since appreciated by 1.5%. However, it faced renewed pressure after U.S. President Donald Trump commented that the ceasefire with Iran was "over".
Duncan Tan, APAC rates strategist at HSBC, noted in a Wednesday note that improved sentiment towards the rupee, driven by expectations of significant foreign exchange inflows, has limited the risk of currency volatility pushing offshore OIS rates higher.