India IRS Review
Off lows as India, US bond ylds rise in 2nd half of trade
This story was originally published at 19:34 IST on 17 October 2025
Register to read our real-time news.Informist, Friday, Oct. 17, 2025
By Aaryan Khanna
NEW DELHI – Overnight indexed swap rates ended off lows as Indian and US government bond yields rose in the second half of trade, dealers said. Swap rates had fallen sharply earlier in the day, tracking a fall in US Treasury yields, but a resurgence in the 10-year US yield to near 4% again pushed up rates, they said.
The one-year swap rate closed at 5.44% from 5.43% at Thursday's close, after falling to as low as 5.41% in early trade. The five-year swap rate closed at 5.62% against 5.63% Thursday, after hitting a low of 5.57%. The total notional trade volume on Clearing Corp. of India's derivatives trading platform was INR 392.30 billion, down from INR 485.80 billion in the previous session.
The yield on India's most-traded 10-year government bond ended at 6.51%, after falling to as low as 6.47% earlier in trade. Bond yields rose after the weekly gilt auction showed poor investor demand for long-term bonds. Traders who placed bids at higher yields on the 50-year benchmark, 7.09%, 2074 gilt at the auction, unexpectedly got some of the supply and sold bonds in the secondary market, dealers said.
"The big reaction and the reason actually for the enthusiasm dying in swaps was because bonds reacted very poorly to the auction result," a dealer at a primary dealership said. "Beyond that, the 10-year US yield was moving higher towards the close, so there was nobody to receive (fixed rates)."
The five-year OIS contract was the most traded likely due to two-way activity from offshore traders, divided into the two halves of the session. The receiving interest from offshore has been consistent over the past few days and continued to be so during the day, dealers said. The 10-year US yield fell to 3.94% earlier in the day, its lowest in six months, from 4.04% at 1700 IST Thursday.
Recent reports on losses in some US banks have raised concerns about financial stability in the world's largest economy. This increased expectations that the US Federal Open Market Committee would ease monetary policy further in the remainder of 2025 and in 2026 as well, to prevent broader financial risk from tight monetary policy, dealers said. Rate-sensitive two-year US Treasury yields fell to their lowest in a year.
"Since US yield (the 10-year US yield) has broken 4%, there is a big downside risk to OIS rates that is going to continue mounting," a dealer at a private bank said. "I may not believe that we have the room to rally based on the (India) rate view alone, but the (offshore) flows will make me lose a lot of money if I pay aggressively."
However, the US benchmark yield recovered to 4.00% by 1700 IST Friday, leading to some traders unwinding their received bets on OIS. Some foreign banks also paid fixed rates in the five-year swap rate after striking bond-forward rate agreements with life insurers, dealers said. With OIS rates already reflecting a 25-basis-point repo rate cut in India, domestic traders likely paid fixed rates in swaps maturing up to one year, erasing all gains in those maturities.
OUTLOOK
OIS rates are not traded on Saturdays. On Monday, OIS rates may take cues from the movement in US Treasury yields. The movement in swap rates may be limited in a truncated week, with RBI-administered markets shut on Tuesday and Wednesday for Diwali, dealers said.
With the minutes of the MPC's Sept. 29-Oct. 1 meeting seen weakening the case for a February rate cut, traders do not expect a sharp movement in OIS rates based on domestic cues in the near term, dealers said. Traders are likely to retain their rate cut bets for December 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 MPC to ease rates further, though a December rate cut is fully priced into the one-year swap rate for the past several weeks and will not move swap rates lower, 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 further 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 | THURSDAY | |
1-year OIS | 5.44% | 5.43% |
2-year OIS | 5.38% | 5.38% |
5-year OIS | 5.62% | 5.63% |
2-year MIFOR | 5.79% | 5.82% |
5-year MIFOR | 6.21% | 6.22% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Saji George Titus
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