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Informist, Thursday, Jan. 8, 2026

 

By Aaryan Khanna

 

MUMBAI – Overnight indexed swap rates inched higher Thursday after easing for two consecutive sessions due to offshore receiving interest, dealers said. With no significant flows during the session, some participants took the opportunity to pay fixed rates, especially after the rupee weakened and domestic gilt yields rose. Amid the absence of clear cues on the interest rate trajectory, traders focused on hedging their portfolios rather than taking fresh ones.

 

The one-year swap rate ended at 5.48%, compared to 5.46% Wednesday. The five-year swap rate ended at 5.94%, from 5.92% at the end of the previous session. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 247.15 billion, lower than INR 330.60 billion Wednesday. 

 

Domestic traders paid fixed rate contracts as swap rates hit the lower end of the recent trading range, dealers said. Swaps also tracked a rise in government bond yields ahead of fresh supply Friday, and a fall in the rupee, they said. The 10-year benchmark 6.48%, 2035 gilt yield ended at 6.63%, up nearly 2 basis points from its previous close, as traders made room for fresh stock at the INR-290-billion gilt auction Friday. On the currency front, the rupee ended at 90.0175 per dollar on Thursday, falling below the psychologically crucial 90-mark to a day's low of 90.1300, which pushed up swap rates, dealers said.

 

Moreover, a lack of significant participation from offshore traders led to hedging interest from domestic traders in a day of dull volumes, since overseas investors were only looking to receive fixed rate contracts when the five-year swap rate rose above 5.95%, dealers said. Domestic traders found the spread between short-term gilts and swap maturing in up to three years lucrative, as they purchased the former and paid fixed rate contracts in the latter, they said. 

 

"It was another day of sideways trade," a dealer at a foreign bank said. "Yes, the short-term bonds are being used to position for the next few policies, but this is just usual behaviour and yes, it has been happening for the last few days." The spread between the benchmark five-year 6.01%, 2030 bond and the three-year OIS rate was 63 basis points Thursday.

 

A lack of optimism on further rate cuts, alongside tight systemic liquidity in the banking system, pushed up rates, dealers said. The net liquidity absorbed from the banking system by the RBI – a proxy for the liquidity surplus – was INR 353.84 billion on Wednesday, down from INR 801.34 billion Tuesday. The overnight Mumbai Interbank Offered Rate was set at 5.44% Thursday, up 10 bps from Wednesday as the liquidity surplus fell due to tax payments, dealers said. The overnight weighted average call money rate--the central bank's operating target--ended at 5.40%, above the repo rate of 5.25% Thursday. Dealers fear that overnight borrowing rates are likely to remain elevated until the end of the March quarter.

 

"Ultimately, the rates are not reflecting any changes in rates until one year," a dealer at a private-sector bank said. "It is only the two-year rates, which are pricing in a rate cut. I think that is a fair pricing and reflects the market view accurately, so we are not able to break out of the range."

 

OUTLOOK

On Friday, swap rates may track the overnight movement of US Treasury yields after jobless claims in the US rose lower than expected to 208,000 in the week ended Jan. 3, against a Wall Street Journal poll estimate of 210,000, data released post Indian market hours showed. US non-farm payrolls data for December is scheduled for release after Indian market hours Friday. The impact of the data on US rate-cut expectations and US yields will influence domestic OIS rates. Without a strong trigger, the five-year swap rate is not seen falling below 5.89%, dealers said. 

 

Swaps will also track the movement of gilt yields during the day, as traders gauge appetite for bonds at the weekly gilt auction, dealers said. Traders will closely track technical levels on swaps, as the five-year swap neared the key 6.00% level earlier this week. Traders will also monitor developments in the India-US negotiations for a trade deal. They may also track crude oil prices and geopolitical developments for cues. The one-year swap rate is seen at 5.40-5.56% and the five-year at 5.85-6.12% Friday.

 

	At 1700 IST	WEDNESDAY
1-year OIS	5.48%	5.46%
2-year OIS	5.57%	5.55%
5-year OIS	5.94%	5.92%
2-year MIFOR	6.06%	6.01%
5-year MIFOR	6.43%	6.40%

 

End

US$1 = INR 90.0175

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

 

With inputs from Cassandra Carvalho

Edited by Tanima Banerjee

 

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