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Informist, Monday, Dec. 8, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended sharply higher on Monday led by the five-year contract, tracking a rise in the rate curves on other rupee derivatives including dollar-rupee forwards. Offshore traders were paying fixed rates betting on the Reserve Bank of India's Monetary Policy Committee to not cut the repo rate any further from the current 5.25%. With the bar for further rate cuts seen high, traders began preparing for a reversal in the rate cycle 12 months down the line, which led to lack of receiving interest in the two- and five-year swap rates despite the surge.

The one-year swap rate ended at 5.47%, up from 5.43% Friday. The five-year swap rate ended at 5.91% against 5.80% Friday, its highest closing level since Mar. 27. The five-year swap rate rose the most since May 8 after traders hit stop-losses on the contract near 5.86%. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform fell to an above-average INR 550.95 billion, from INR 840.90 billion Friday.

The benchmark one-year dollar-rupee annualised forward premium Monday rose 10 basis points to close at 2.61%, its highest close since January. The two- and three-year year modified Mumbai Interbank Forward Outright swap rates rose 7 basis points each to 6.10% and 6.23%, respectively. The rise in both swap curves led to a sustained rise in the two- and five-year OIS rates as well, with offshore traders unwinding their received fixed rate positions to lighten their rupee-denominated portfolios near the end of the year, dealers said. 

"It is the rupee's distortion which is driving all the derivative curve higher and the MIBOR (Mumbai Interbank Outright Rate) cannot sustain in the face of it. It is not only arbitrage, people are paying directly as well," a dealer at a primary dealership said. "Offshore guys are cleaning up their books and with the rupee now breaking 90 (a dollar), forward rates are still seen higher despite the RBI's swap announcement."

The rupee fell to 90.26 a dollar intraday though it ended off the low at 90.07 a dollar. The domestic unit has weakened 5.2% against the greenback so far in 2025 with further depreciation of 3.0-3.5% seen in 2026, following RBI Governor Sanjay Malhotra's comments in November that such a fall is in line with historical trends. With the one-year forward premium currently well below those levels, the rise in forward rates is likely to continue and put pressure on OIS rates as well, dealers said.

With this, the five-year swap rate gave up all gains in 2025-26 (Apr-Mar) despite 100 basis points of repo rate cuts so far in the current financial year. Offshore paying interest was heightened by a rise in US Treasury yields ahead of the US Federal Open Market Committee's rate decision at 0030 IST Thursday. The 10-year US Treasury yield rose to 4.16% at 1700 IST Monday from 4.11% at the end of Indian market hours Friday.

Traders said the bar for further rate cuts was high after the MPC cut the repo rate by 25 bps to 5.25% and the RBI announced measures to infuse nearly INR 1.5 trillion of rupee liquidity in December. With no further rate cuts in sight, traders looked to bet on the reversal of the rate cycle to hikes. While a rate hike in the next few quarters was unlikely after Malhotra said rates would remain low in the near-term due to the benign inflation, traders bet on rates hikes potentially beginning in December 2026 or February 2027. This widened the spread of the two-year swap rate over the one-year rate, with the former rising 10 bps to 5.57% Monday. 

"The MPC seems to be done, it doesn't have a lot more space to cut," a dealer at a private-sector bank said. "Now, the one-year forward on the one-year rate is showing a 10-15 bps rate hike. But the pricing may be distorted due to the position unwinding today and also because it could just be factoring in tighter liquidity and higher MIBOR rates."

OUTLOOK

On Tuesday, swap rates will open tracking overnight movement in US Treasury yields and the rupee's movement early in the day. Volatility may be contained on caution ahead of the US FOMC decision and release of the Summary of Economic Projections at 0030 IST Thursday, dealers said.

On the domestic front, India's CPI inflation for November, scheduled for release Friday, may lend cues. However, traders are more focussed on CPI prints January onwards with the RBI projecting retail inflation to average 0.6% in the December quarter. Chances of another cut in the repo rate are seen unlikely at the current juncture unless India's GDP growth slumps, dealers said.  

Traders will also track geopolitical developments, especially those related to the India-US trade deal, and the movement in crude oil prices. The one-year swap rate is seen at 5.38-5.50% and the five-year rate is seen at 5.68-5.85%.

End

US$1 = INR 90.07

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Ashish Shirke

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