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Informist, Friday, Jan. 16, 2026

NEW DELHI – Overnight indexed swap rates ended higher Friday after both domestic and offshore investors paid fixed rates across tenures on the view that there would be no further monetary policy easing in India, dealers said. The rise in the five-year swap rate past the psychologically crucial 6.00-6.01% level triggered stop-losses among traders, dealers said. 

The one-year swap rate ended at 5.53%, its highest close in over three months, from 5.51% Wednesday. After two sessions of traders trying to break the key 6.00% mark, the five-year swap rate finally ended at 6.03%, its highest closing level since Feb. 24. The five-year rate had ended Wednesday at 5.99%. Money markets were shut Thursday because of local body polls in Maharashtra. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 425.10 billion against INR 408.75 billion Wednesday.

Domestic mutual funds were paying fixed rates in swap rates of up to two years, dealers said. While some traders bought bonds and paid swap rates, betting on the spread between the two to narrow, most dealers said the 45 basis-point spread of the five-year benchmark yield over the five-year OIS rate was not very lucrative. Instead, the move was to protect the value of the underlying securities amid a steady rise in government bond yields, dealers said. The 10-year gilt yield ended 3 bps higher at 6.68% Friday and is up 7 bps from Monday, reflecting disappointment that Bloomberg Index Services decided not to include India's fully accessible route bonds in its flagship Global Aggregate Index this week.

"There is paying pressure from all across the market," a dealer at a foreign bank said. "Offshore guys are a bit more active today, not a lot, but they have been on the paying side. Mutual funds are also hedging positions on the domestic side. They are paying OIS because bonds are losing value fast." The two-year swap rate ended at 5.63%, its highest since Apr. 9, from 5.60% Wednesday.

While the rise was more prominent in longer-term swap rates, the short-term OIS rates also inched up in robust trade. Dealers said they were also unsettled by the uncertainty around the overnight Mumbai Interbank Outright Rate fixing, which has not persisted around the repo rate regularly since the December policy outcome. The benchmark MIBOR rate was set at 5.46% Friday and has not been set at or below the 5.25% repo rate since Dec. 12. It has been set above 5.30% since then.

Traders do not expect the Reserve Bank of India's Monetary Policy Committee to cut the repo rate any further after 125 bps of reduction between February and December. Inflation is expected to rise in the coming quarters to near the central bank's medium-term target of 4%, with growth also expected to hold up above 6.5%. These dynamics are unlikely to put pressure on the rate-setting panel to ease policy at a time when geopolitical uncertainty is rife, dealers said.

The RBI's durable liquidity infusion has also been significant but has failed to ease either money market or MIBOR rates consistently, which has led to traders preferring to pay OIS rates, dealers said. The central bank has conducted three open market operation auctions between Dec. 29 and Monday totalling INR 1.5 trillion, with another INR 500-billion auction scheduled for Thursday. It also conducted a $10 billion, three-year dollar-rupee buy/sell swap auction this week. Despite these measures, the daily liquidity surplus with the banking system--as measured by the RBI's net liquidity absorbed--has failed to cross 1% of banks' net demand and time liabilities since early December.

"The RBI is not allowing liquidity to flood into the system, it is taking reactive measures that are then wiped out by its FX (foreign exchange) intervention almost instantly," a dealer at a primary dealership said. "Though it is tricky to pay at these levels, but the momentum is upward and so very few people want to take a large contrary view to receive."

OUTLOOK

Swap rates are not traded Saturday. OIS rates may fall Monday tracking an expected fall in gilt yields. Some traders may also unwind paid fixed rate positions or receive OIS rates at levels seen as lucrative and at multi-month highs, dealers said.

However, traders are expected to pay fixed rates below the 6.00% rate on the five-year swap. Swap rates are expected to continue rising as traders are betting that the Monetary Policy Committee will not ease rates further and its net action will be to raise the repo rate early in 2027.

The movement in US Treasury yields may also lend cues. With the 10-year US yield in the 4.10-4.20% range it has held since early December, the overseas trigger may have limited impact on OIS rates, dealers said. Fed funds futures reflected a 95.0% chance of status quo on rates at the US Federal Open Market Committee's January meeting, according to the CME's FedWatch tool.

Traders will also monitor developments in the India-US trade negotiations, crude oil prices, and further geopolitical developments. Monday, the one-year swap rate is seen at 5.45-5.58% and the five-year at 5.91-6.05%.

End

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

Edited by Saji George Titus and Rajeev Pai

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