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Informist, Monday, Dec. 22, 2025

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher as the minutes of the Reserve Bank of India's Monetary Policy Committee meeting in December were on expected lines but did not make a case for a rate cut in February, dealers said. A rise in US Treasury yields and volatility in other domestic instruments also pushed OIS rates up to multi-month highs.

The one-year swap rate ended at 5.51%, its highest closing level since Sept. 4, against 5.48% Friday. The five-year swap rate ended at 5.98%, its highest close since Mar. 11 and up from 5.95% Friday. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 235.75 billion, up from a paltry INR 85.70 billion Friday.

"I would say the OIS rates are the least affected. The one-year dollar-rupee swap premium is up 20 basis points, MIFOR is up 10-11 bps, bonds (the 10-year benchmark gilt yield) is up 6-7 bps. Some impact is showing on OIS as well, as people will hedge their positions wherever they can," a dealer at a foreign bank said. The one-year forward premium rose as much as 20 bps to 3.06% Monday due to excess dollar liquidity, its highest since October 2022. The 10-year gilt yield ended 7 bps higher at 6.67%.

"Offshore is quiet as everyone is on holiday," the dealer said. The five-year swap, typically the most traded contract, was the fourth most-traded instrument with only INR 22.35 billion worth of deals due to the lack of activity from foreign banks in India and in the non-deliverable OIS market, dealers said. This was despite the 10-year US Treasury yield rising to 4.17% Monday from 4.14% at 1700 IST Friday.

The trading volume was concentrated in swaps maturing in up to one year. The one- and two-year swap rates rose because of the runaway rise in the dollar-rupee forward premium of similar tenures. The one-year swap rate continued to reflect some chance of a rate hike in Oct-Dec 2026 while short-term swap rates were pushed higher by the high overnight Mumbai Interbank Outright Rate, dealers said. The floating leg of the OIS swap has been above the policy repo rate of 5.25% since Dec. 12. It was at 5.44% Monday.

Traders said the minutes of the December Monetary Policy Committee meeting suggested there was room enough to cut interest rates if growth momentum sank but did not show a preference for an immediate rate cut after 125 bps of repo rate reductions in 2025. The rate-setting panel cut the repo rate by 25 bps to 5.25% earlier December while retaining the "neutral" policy stance. External member Ram Singh continued to bat for an "accommodative" stance given dormant price momentum and to support growth, but his was an outlier view on the panel. Following the minutes, the market does not expect a repo rate cut in February as the GDP growth prints are likely to remain robust, dealers said.

"The minutes were on expected lines, I think the message was that look, we have done what we have done and now it's going to be at this level for some time," a dealer at a private-sector bank said. "Beyond that, the market will look at what next, and what you are getting in the nine-month and one-year swap rates are showing chances of a rate hike."

OUTLOOK

On Tuesday, swaps may track movements in US Treasury and gilt yields due to the lack of other significant triggers on interest rates. They may also track the rupee's movement against the dollar and the movement in forward premiums, with the one-year benchmark dollar-rupee forward premium rising to an over-three-year high Monday. 

As the year nears its end and the Christmas holiday season begins, trade volumes may remain low, with several traders likely to be on leave, dealers said. Offshore activity will decline during the Christmas week and heading into the New Year as foreign banks and primary dealers close their accounts at the year-end or go on holiday, dealers said.

This month, some offshore investors have taken calls to pay fixed-rate contracts in markets across Asia amid current geopolitical and monetary policy conditions, dealers said. However, in January, foreign investors and banks may be more active and look to receive fixed-rate contracts. Bond yields may also fall next month, as traders expect the RBI to announce additional open market purchases of gilts. Traders also expect Indian government bonds to be included in Bloomberg's flagship Global Aggregate Index in a January announcement. Market participants expect inflows from foreign portfolio investors to begin in the new year and to total $25 billion in 2026, which may pull down swap rates as well.

After India's CPI for November was essentially a "non-event" for swaps, traders are focused on the CPI prints January onwards, with the RBI projecting retail inflation to average 2.9% in the March quarter. India's advance estimate on GDP for the financial year 2025-26 (Apr-Mar) in the first week of January may also be crucial for traders to take bets on further repo rate cuts by the Monetary Policy Committee, though there are no rate-cut bets for February currently reflected in OIS rates, dealers said.

Traders will monitor developments around the India-US trade deal and may also track crude oil prices for cues. The one-year swap rate is seen at 5.38-5.60% and the five-year swap rate is seen at 5.85-6.02%.

End

US$1 = INR 89.65

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

Edited by Rajeev Pai

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