A surge in Indian overnight indexed swap (OIS) rates — typically a key barometer of policy rate expectations in normal times — is overstating the likely impact of the Iran war and higher oil prices on domestic monetary policy, traders and economists said.
India’s one-year and two-year OIS rates jumped more than 45 basis points each since the Israeli-U.S. war with Iran broke out on February 28, while the benchmark 10-year bond yield has risen by a more modest 11 basis points through Monday, before paring some of the increase.
At current levels, swap rates are pricing in close to two rate hikes by the Reserve Bank of India over the next 12 months.
Economists and traders, however, say that assessment looks exaggerated given still-benign inflation conditions.
“We do not see a possibility of a near-term rate hike in India as we do not expect retail fuel prices to move higher immediately,” said Suvodeep Rakshit, economist at Mumbai-based Kotak Institutional Equities.
“Oil marketing companies or the government are likely to keep fuel prices unchanged, and the central bank will take that into account.”
India has invoked emergency measures to divert gas supplies to households and for transport fuel, limiting access for industry as the war in the Middle East keeps energy prices elevated with persistent concerns about supply.
With inflation currently below the central bank’s 4% target, a rate hike does not appear to be on the horizon, a source familiar with the RBI’s thinking said, declining to be identified as the person is not authorised to speak to media.
Signals from the swap market should therefore not be read as an outlook on monetary policy, the person added.
An email sent to the central bank remained unanswered.
Traders said part of the sharp move in swap rates reflects investors exiting previously built speculative positions rather than initiating fresh bets on policy tightening, adding noise to the signal that is typically derived from swap markets.
Anticipating ample liquidity and benign inflation, overseas investors had built sizable “received” positions in one- and two-year OIS, a senior rates trader at a euro-area headquartered bank said.
As oil prices surged and emerging market rates rose globally, those trades were quickly unwound as a risk-management measure, the trader added.
The resulting paying flows pushed swap rates sharply higher.
The rush to exit positions was also reflected in a pickup in trading activity, with daily average OIS volumes rising around 30% in the first week of March compared to the daily average activity in February.
Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, said the selloff in bonds has been cushioned by strong RBI support, even as swaps reacted more sharply to adverse newsflow.
The central bank is buying bonds worth 1 trillion rupees ($10.89 billion) this week and has been an active buyer in the secondary market in recent days, helping cap the rise in yields.
Published on March 11, 2026
