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Informist, Tuesday, Dec. 9, 2025

By Aaryan Khanna

MUMBAI – Overnight indexed swap rates ended higher for the second straight day as offshore traders continued to pay fixed rates, noting the rise in interest rate swaps and US Treasury yields, dealers said. The rise in the one-year swap rate was limited, as it had already priced in the current repo rate of 5.25% as the terminal rate and even reflected some chance of a rate hike within 12 months.

The one-year swap rate ended at 5.48%, up from 5.47% Monday. The five-year swap rate ended at 5.96% against 5.91% Monday, its highest closing level since late March. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform fell to INR 354.20 billion from INR 550.95 billion Monday.

The five-year swap rate jumped to a fresh eight-month high toward the beginning of trade as an offshore hedge fund paid fixed rates in the non-deliverable OIS market. This led to a sharp rise in the five-year swap rate to the day's high of 5.96%. The expectation of sticky global inflation and developed economies unlikely to pursue further rate cuts led to paying interest from large funds across emerging markets, a key driver of the sharp rise in domestic OIS rates, dealers said.

Moreover, the Reserve Bank of India's Monetary Policy Committee is seen to be out of ammunition after cutting the repo rate by 25 basis points to 5.25% on Friday, while maintaining its stance at neutral. It is not expected to act on rates in February and may take a long pause over the subsequent few meetings after 125 bps of rate cuts, dealers said. Comments from RBI Governor Sanjay Malhotra at the post-policy press conference indicated a high bar for rate cuts, though he said India's policy rate is likely to remain low in the near future due to benign inflation.

"At some point, the fundamentals have to make sense, which they are not making sense right now. Swaps are pricing in a rate hike in Oct-Dec 2026 without any regard for a further rate cut," a dealer at a foreign bank said. "But that is what the market is now looking at, and it's better to pay on dips because the momentum is strong from offshore."

With the sharp rise in swap rates but a relatively subdued move upward in gilt yields since Friday, when the MPC cut the repo rate and the RBI announced open market operations to buy INR 1 trillion on gilts in December, the spread between the two instruments fell. This led traders to unwind their bond-swap trades, which they had entered betting on such a compression, dealers said. Mutual funds had already created positions where they bought long-term bonds while hedging the exposure by paying the five-year swap rate – this trade was heavily unwound near 5.95% on the five-year swap rate, which fell to the day's low of 5.90%.

"Funds are receiving five-year is what I heard in OIS," a dealer at a private sector bank said. "Unwinding bond swap means receive OIS and sell the bond. If you see, five-year bond swap has compressed a lot to 33 basis points... so maybe we're seeing that selling in bonds, and OIS they (mutual funds) have cut out." Some funds had initiated those trades when the five-year OIS rate was 5.65-5.70%, dealers said.

Traders remained wary of the rise in US Treasury yields ahead of the US Federal Open Market Committee rate decision at 0030 IST Thursday. The 10-year US yield has risen to 4.15% from 4.02% at November-end on increasing bets that the panel would deliver a "hawkish rate cut" – cut the policy rate by 25 bps but guide for limited further monetary easing. This may lead US yields to rise even after the rate reduction, dealers said. 

OUTLOOK

On Wednesday, swap rates will open tracking overnight movement in US Treasury yields ahead of the US FOMC decision and release of the Summary of Economic Projections at 0030 IST Thursday, dealers said. Offshore flows are likely to continue to drive the movement in OIS rates amid a lack of interest rate cues on the domestic front since the MPC's repo rate cut Friday.

India's CPI inflation for November is the next domestic cue on traders' radar, due on Friday. However, traders are more focused on CPI prints from January onwards, with the RBI projecting retail inflation to average 0.6% in the December quarter. The chances of another cut in the repo rate are seen as unlikely at this stage unless India's GDP growth slumps, dealers said.  

Traders will also track geopolitical developments, especially those related to the India-US trade deal, and movement in crude oil prices. The one-year swap rate is seen at 5.44-5.55% and the five-year rate is seen at 5.80-6.00%.

End

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

Edited by Saji George Titus

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