Summary of this article
Interest rate futures activity hit a 63-month high in May ahead of the RBI MPC meeting
Policy uncertainty over a rate hike or pause drove trading activity higher
Proprietary traders led the surge, accounting for nearly 70 per cent of market activity
Analysts remain divided between a 25 bps hike and a status quo decision
Activity in India's interest rate futures market surged sharply in May as traders positioned themselves ahead of the Reserve Bank of India's (RBI) monetary policy committee (MPC) meeting this week, where policymakers face a difficult choice between responding to emerging inflation risks due to rising crude oil prices and supporting economic growth.
Average daily turnover (ADT) in interest rate futures on the National Stock Exchange (NSE) jumped 53 per cent month-on-month (m-o-m) to Rs 231.61 crore in May, the highest level in 63 months, according to data from the NSE. This was up from Rs 151.49 crore in April. Compared to May 2025, the turnover jumped 345 per cent from Rs 52 crore. On a year-on-year (y-o-y), basis, turnover soared 345 per cent from a meagre Rs 52 crore in May 2025.
Trading activity also increased significantly, with total monthly volumes rising 53 per cent m-o-m to 228,808 contracts.
The sharp rise in activity comes just ahead of the RBI's June 3-5 MPC meeting, where policymakers are expected to decide whether to keep interest rates unchanged or take a tougher stance on inflation. RBI Governor Sanjay Malhotra will announce the policy decision on June 5.
While most market participants expect the RBI to hold rates steady, some analysts believe rising inflation risks from higher crude oil prices, a weaker rupee, and monsoon-related concerns could push the central bank towards a rate hike or a more hawkish outlook.
With the market lacking a clear consensus on the RBI's upcoming policy decision, participants appear to be increasingly using the derivatives market to hedge interest-rate risk and position themselves for different policy outcomes.
Rising Inflation Risks Spur Hedging Activity
Interest rate futures are among the most sensitive instruments to monetary policy expectations. These contracts allow market participants to hedge interest-rate risk, manage bond portfolio exposure, and position themselves for potential shifts in the RBI's policy stance.
Trading activity in interest rate futures typically increases before major RBI policy announcements as market participants prepare for different outcomes. Investors expecting higher rates may use futures to hedge potential losses in their bond portfolios, while those anticipating a pause in rates may position themselves for stable or lower bond yields. This appears to be the case ahead of the June MPC meeting.
India's retail inflation remains below the RBI's 4 per cent target, but concerns are building around rising wholesale inflation, elevated crude oil prices, a weakening rupee and the possibility of below-normal monsoon rainfall. Wholesale inflation surged to 8.30 per cent in April, driven largely by higher fuel and power costs, while the ongoing geopolitical tensions in West Asia have pushed global crude prices higher.
At the same time, tighter monetary policy could weigh on economic growth at a time when policymakers are also monitoring external risks and domestic demand conditions. With the market lacking a clear consensus on the RBI's upcoming policy decision, participants appear to be increasingly using the derivatives market to hedge interest-rate risk and position themselves for different policy outcomes.
What’s Fuelling the Futures Rally
The surge in turnover was accompanied by a notable shift in market participation. According to NSE’s May 2026 Market Pulse report, the surge in interest rate futures activity in April 2026 was largely driven by proprietary traders, whose participation climbed to multi-year highs, while corporate and retail investors reduced their presence in the segment.
According to the report, the composition of participants in the interest rate futures market changed significantly in April, with proprietary traders emerging as the dominant force. Their share of trading activity rose to 69.60 per cent, the highest level in six years, supported by a sharp increase both on a monthly and annual basis.
On the other hand, corporate participation fell to 27.80 per cent, its lowest level in four-and-a-half years, while individual investors’ participation nearly halved to 2.10 per cent. Participation from institutional investors remained largely absent.
Rate Hike Or Status Quo? Analysts Remain Divided
Some analysts expect a 25 basis point (bps) rate hike, arguing that inflation risks are beginning to outweigh growth concerns. Others believe the RBI will maintain the status quo while signalling greater vigilance on price pressures.
Shravan Shetty, managing director at Primus Partners, said that inflationary pressures are becoming difficult to ignore. “There is upward pressure primarily due to falling rupee and expected inflation pressure from rising crude prices,” he said. Shetty said, the “ideal scenario would be to raise interest by 25 bps and look at another rate hike down the line”.
However, he noted that RBI may choose to wait for more clarity before acting. “There is a possibility that RBI delays the hike for the next cycle with the aim of going aggressive and looking at a 50 bps increase down the line,” he added. Given that crude prices have started rising and the full impact of the monsoon will become clearer only in the coming months, “RBI has the space to wait for this cycle but take a hawkish stand signalling intent,” he said.
Others argue that growth concerns still warrant caution.
“The RBI faces a genuine dilemma. Inflation remains sticky, but aggressive rate hikes could derail India’s growth trajectory,” said Paresh Bhagat, chairman at Mangal Keshav Financial Services. With the balance between price stability and economic expansion remaining “precarious”, Bhagat believes “holding rates steady appears the prudent course at the upcoming policy meet”
He added that a pause would give policymakers additional time to assess evolving macroeconomic conditions. “By pausing, the RBI buys time to observe how inflation and growth dynamics play out before committing to any further tightening,” he added.
Churchil Bhatt, executive vice president – investment at Kotak Mahindra Life Insurance said he was expecting an increase in rate. “The RBI, in its upcoming policy meeting, is likely to hike the policy repo rate by 25 bps,” he said.
Bhatt said the case for tighter policy stems largely from inflation risks rather than currency concerns.
“The RBI is far from considering rate action as a defence for a depreciating rupee. However, upside risks to inflation from energy, along with the possibility of a super El Niño, may warrant a moderate policy response,” he said.
He also pointed to policy actions by regional peers, noting that “most central banks in emerging Asian economies have recently hiked policy rates” for similar reasons. While he expects measures to support the rupee, Bhatt added that “a spike in energy costs arising from the ongoing situation in Iran may warrant some action on policy rates”.
