India IRS Review
Five-year falls tracking US yields as FOMC meet approaches
This story was originally published at 20:11 IST on 14 October 2025
Register to read our real-time news.Informist, Tuesday, Oct. 14, 2025
By Aaryan Khanna
NEW DELHI – The five-year overnight indexed swap rate ended lower tracking a fall in US Treasury yields because of heavy receiving by offshore traders, dealers said. Swap rates maturing up to one year were little changed as there were no fresh cues on interest rate cuts in India, they said.
The one-year swap rate closed at 5.43%, unchanged from Monday's close. The five-year swap rate closed at an over four-month low of 5.60%, down from 5.64% Monday. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 441.76 billion, up from INR 374.30 billion in the previous session.
The five-year contract was by far the most-traded on Tuesday. At 1700 IST, the yield on the 10-year benchmark US Treasury note was 4.02%, compared with 4.04% at the same time Monday, after hitting a low of 4.00% intraday. Offshore traders had been on the sidelines over the past few days, but as the US Federal Open Market Committee meeting approaches, they were increasingly placing bets in the domestic market. Moreover, offshore non-deliverable OIS rates were lower than onshore rates, leading to arbitrage trades across the two contracts and driving the five-year OIS rate down.
"We are moving in line with the global dynamics," a dealer at a primary dealership said. "US yields (the 10-year US yield) are near 4%, offshore players are active, and domestic rate cut is coming. So it is inevitable that (OIS) rates will stage some rally."
Traders expect the Reserve Bank of India's Monetary Policy Committee to cut rates in December, especially as September's CPI inflation was at an over eight-year low of 1.54% and October's retail inflation is seen as low as 0.2%, according to IDFC FIRST Bank. This has already been priced into OIS rates, which limited the movement in short-term swaps, dealers said.
Some traders expect the rate-setting panel of the RBI to cut the repo rate in December and February, and are increasingly placing bets on more monetary easing in India than that priced into OIS rates, dealers said. A crucial test for this is likely to be the minutes of the Monetary Policy Committee's latest meeting, due Wednesday. Though the panel said that room had opened up to support growth through monetary easing, traders look forward to the extent of the consensus on further rate cuts. Two of the external members – Nagesh Kumar and Ram Singh – had also favoured changing the policy stance to "accommodative" from "neutral", signalling that the next action may be to bring down the repo rate from the current 5.50%.
"Right now, the market is driven by the offshore trade bringing down onshore OIS as well," a dealer at a foreign bank said. "Nobody has made much money on OIS in the last few months, so traders really want to believe that the MPC has turned. But I think it's smarter to wait for the minutes rather than go into it blind."
OUTLOOK
On Wednesday, OIS rates may take cues from the movement of US Treasury yields in early Asian trade. Traders may avoid aggressive bets before the minutes of the Monetary Policy Committee's Sept. 29-Oct. 1 meeting are released at 1700 IST Wednesday, dealers said.
Traders may continue receiving fixed rates and ramp up bets of one or more rate cuts in December and beyond after the Monetary Policy Committee signalled that low inflation had opened space for policy easing, dealers said. These bets got a fillip after CPI inflation fell to an over-eight-year low of 1.54% in September from 2.07% in August. Economists project October CPI inflation at less than 1%, the lowest in the current series with 2012 as the base year. This is likely to put pressure on the Monetary Policy Committee to ease rates further, though a December rate cut is fully priced into the one-year swap rate for the past several weeks, dealers said.
On the global front, traders may track developments in the US after the government partially shut down in early October. Traders may take cues from geopolitical developments, especially on India-US trade talks.
Swaps may also track the movement of the rupee against the dollar and of crude oil prices. The one-year swap rate is seen in the range of 5.38-5.48% and the five-year contract at 5.55-5.66%.
At 1700 IST | MONDAY | |
1-year OIS | 5.43% | 5.43% |
2-year OIS | 5.35% | 5.36% |
5-year OIS | 5.60% | 5.64% |
2-year MIFOR | 5.80% | 5.82% |
5-year MIFOR | 6.19% | 6.21% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Ashish Shirke
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