India’s Long-Term Rate Swaps Jump as Markets Price in End of Monetary Easing

India’s 10-year interest rate swaps rose sharply, hitting 7.18%, marking a 25 basis point increase from the previous week and the highest level since early 2024. This move signals a significant shift in market sentiment, as participants reprice the likelihood of sustained policy rates. The upward trajectory in long-dated swaps suggests investors now expect the Reserve Bank of India to maintain elevated borrowing costs well into 2026, even as short-term rates remain stable. The surge follows stronger-than-expected inflation data in November, with headline CPI rising to 5.1% year-on-year, exceeding the central bank’s upper tolerance threshold of 5%. This has eroded confidence in a near-term rate cut, despite the RBI’s cautious stance on rate reductions. Market participants now price in only two rate cuts over the next 18 months, down from five previously anticipated. Financial institutions, including major domestic banks and asset managers, are adjusting their balance sheets and hedging strategies in response. The increase in swap rates has also pressured long-term government bond yields, with the 10-year benchmark Treasury yield climbing to 7.25%, the highest in over a year. This environment may raise financing costs for infrastructure projects and long-term corporate debt, potentially slowing investment activity. The shift underscores a broader trend in emerging markets where inflation persistence is dampening expectations of aggressive monetary loosening. India’s rate swap movement is now closely watched by foreign investors managing exposure to Indian debt, as it influences portfolio allocations and risk assessments.