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Informist, Tuesday, Dec. 30, 2025

 

By Cassandra Carvalho 

 

MUMBAI – Overnight indexed swap rates ended lower Tuesday, as traders squared off their paid positions ahead of closing their books before the last day of the December quarter, dealers said. The three-month overnight indexed swap rate had the highest traded volume amongst tenures at INR 270.70 billion, as traders trimmed risk and settled their positions in this tenure since its maturity almost coincides with the end of the financial year in March, dealers said.     

 

The one-year swap rate ended at 5.45%, down from 5.48% Monday. The five-year swap rate ended at 5.92% against 5.94% Monday. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 410.75 billion, more than four times the INR 97.25 billion Monday. The yield on the benchmark 10-year US Treasury note was 4.12% at 1700 IST, unchanged from the same time Monday but up from 4.11% at 0900 IST.

 

Some traders paid fixed rates on five-year swaps and bought the five-year benchmark 6.01%, 2030 bond to take advantage of the lucrative spread between the two instruments, dealers said. Traders favoured short-term gilts after the RBI bought INR 240 billion of gilts maturing under five years at Monday's open market operations auction. The 6.01%, 2030 bond ended at INR 98.79, up nine paise from Monday's close. In addition to replacement demand after sales to the RBI, traders found the bond's 107-basis-point yield spread over the 5.25% repo rate attractive enough to add it to their available-for-sale books, dealers said. 

 

"The spreads between 5 cross 5 (five-year gilt and five-year swap rate) is decent... it's good," a dealer at a private sector bank said. "... Spreads are good for buying 5-year (bond) and paying in OIS (5-year)... 5-year paper is also supported at these levels, so yes, it's a good spread."

 

A slight intraday rise in US Treasury yields also supported the paying bias, ahead of the release of the minutes of the US Federal Open Market Committee's December meeting, dealers said. However, most traders are not closely tracking the offshore cue due to limited expectations of further domestic rate easing. Traders expect a higher likelihood of further rate cuts in the US than in India. Traders are not expecting further rate cuts in India, a view furthered after strong IIP growth in November raised fears that GDP data for the December quarter may be on the higher side. India's IIP growth in November, released on Monday, was 6.7%, the highest in 2 years, against an Informist poll estimate of 3.2%.

 

However, the downward bias in swaps was greater since traders settled their paid positions near the end of the quarter. Overnight indexed swap rates are settled on a "T+1" basis on the Rupee Derivatives Dealing System. Traders also re-adjusted their portfolio maturities, since some contracts, such as the three-month swap, which matures on Mar. 30, near the end of Apr-Mar (2025-26). Any excess positions in such contracts would spill onto banks' balance sheets in FY26, dealers said. The three-month swap rate ended at 5.34%, down two basis points from Monday's close. Other swaps maturing in a year or less also ended 2-3 bps lower. 

 

"Three-month OIS got traded. Maybe someone wanted to take out or put risk on the turn of the financial-year end," a dealer at another private sector bank said. 

 

OUTLOOK

On Wednesday, swap rates may track overnight movement of US Treasury yields after the release of the minutes of the US Federal Open Market Committee's December meeting at 1930 IST. However, the impact of the offshore cue may be limited due to a lack of significant domestic interest rate cues, dealers said.

 

Since Wednesday is the last day of the December quarter, traders may continue to adjust their balance sheets before closing their accounts, dealers said. Trading activity may be muted as several traders are on leave for Christmas and the New Year. Furthermore, foreign banks, primary dealers, and offshore traders have limited trading activity near year-end because they have already closed their accounts, dealers said.

 

Market participants expect inflows into debt instruments from foreign portfolio investors to begin in the new year and 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 also pull down swap rates, dealers said.

 

India's advance estimate of GDP for 2025-26 (Apr-Mar), released in the first week of January, may also be crucial for traders to place bets on further repo rate cuts by the Monetary Policy Committee, though no rate-cut bets for February are currently reflected in OIS rates, dealers said. After India's CPI for November was essentially a "non-event" for swaps, traders are focusing on CPI prints from January onward, with the RBI projecting retail inflation to average 2.9% in the Jan-Mar 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 at 5.85-6.02%.

 

	At 1700 IST	MONDAY
1-year OIS	5.45%	5.48%
2-year OIS	5.56%	5.58%
5-year OIS	5.92%	5.94%
2-year MIFOR	6.08%	6.12%
5-year MIFOR	6.42%	6.48%

 

End

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

 

Edited by Saji George Titus

 

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