India IRS Review
Steady in thin trade amid lack of cues on rates
This story was originally published at 20:49 IST on 29 December 2025
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By Cassandra Carvalho
MUMBAI – Overnight indexed swap rates ended steady Monday amid a lack of significant cues on rates. Trade volume remained thin as expected due to a lack of participation from foreign banks and offshore traders between Christmas and the New Year.
The one-year swap rate ended at 5.48% against 5.47% Friday. The five-year swap rate ended at 5.94% against 5.93% Friday. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 97.25 billion, similar to INR 93.60 billion Friday.
Lack of participation from offshore investors led to poor trade volume during the session. Some domestic traders preferred to pay fixed rate contracts, due to lack of hopes of further cuts in the repo rate.
"Right now the prevalent strategy is to pay the dips, because the cycle is going to turn and there's no hope of further cuts," a dealer at a private sector bank said. However, some traders felt that swap rates were "overpaid", since the five-year swap rate at 6.00%--a high it hit last week—is pricing in two rate hikes, whereas traders do not expect a rate hike in the next 12 months.
Others received fixed rate contracts at the technical level of 5.94-5.95% on the five-year swap rate. A rise in gilt yields nearing the end of trade lent an upside bias to swaps nearing the end of trade, dealers said. Due to lack of significant triggers, traders bet on the current trading range of 5.90% to 6.00% on the five-year swap rate.
"Now it's just play the range, between 5.90% (on the five-year swap) and 6.01%, when rates rise you receive (fixed rate contracts) and then when it falls you pay," a dealer at a state-owned bank said. "The attention was on (dollar/rupee premiums) forwards and OIS spread, offshore preferred to receive forwards but now they're also mostly silent so its all domestic-driven."
Traders overlooked the movements in systemic liquidity amidst lacklustre trade. The Reserve Bank of India's open market operation auction Monday is set to infuse INR 500 billion of durable liquidity into the banking system Tuesday. Overnight lending rates were largely above repo for most part of Monday, as the liquidity in the system remains in deficit since Dec. 15.
OUTLOOK
On Tuesday, swap rates may open steady Tuesday due to a lack of significant domestic interest rate cues, dealers said. The overnight movement in US Treasury yields may also lend cues.
Trading activity is likely to be muted as several traders are on leave between Christmas and the New Year. Furthermore, foreign banks and primary dealerships, as well as traders offshore, have limited trading activity near the year-end as they already closed their accounts, dealers said.
Market participants expect inflows into debt instruments from foreign portfolio investors to begin in the new year and to top $25 billion in 2026 as India's fully accessible route bonds are expected to be added to Bloomberg's flagship Global Aggregate Index. This may pull down swap rates as well, dealers said.
India's advance estimate on GDP for 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. 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.
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 5.40-5.52% and the five-year swap rate is seen at 5.85-6.02%.
At 1700 IST | FRIDAY | |
1-year OIS | 5.48% | 5.47% |
2-year OIS | 5.58% | 5.56% |
5-year OIS | 5.94% | 5.93% |
2-year MIFOR | 6.12% | 6.12% |
5-year MIFOR | 6.48% | 6.48% |
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Deepshikha Bhardwaj
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