MUMBAI:  The spread between India's one-year and five-year overnight indexed swaps dropped to its lowest level in over 29 months on Tuesday as bets of aggressive rate hikes from the Reserve Bank of India ebbed.

The one-year swap rate was trading at 6.10%, while the five-year swap rate has fallen more to 6.24%, with the spread dropping to 14 basis points (bps), which is lowest since March 2020.

The spread had been above 50 bps at end of June, and had jumped to as high as 160 bps in April in anticipation of a prolonged rate hike cycle.

"The fact that the Federal Reserve may find it tough to raise rates aggressively is having a cascading effect across asset classes," trader with a private bank said.

The RBI monetary policy decision is due on Aug. 5, with views on the quantum of rate increase split between 25 basis points and 50 basis points, according to a Reuters poll of economists.

The RBI has hiked its repo rate by 90 bps since May.

"Markets have already factored in 35 basis points hike by the RBI on Friday, and expectations of not many hikes after this one has led to strong receiving interest in swaps, especially the five-year part," another trader said.

(Reporting by Dharamraj Lalit Dhutia Editing by Vidya Ranganathan)