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Informist, Tuesday, Jan. 20, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended higher for the fourth straight session tracking a sharp rise in US Treasury yields, dealers said. An early fall in the five-year OIS rate did not sustain as both domestic and offshore traders paid fixed rates tracking the global cue.

The one-year swap rate ended at 5.59%, its highest closing level since May 30, from 5.57% Monday. The five-year swap rate closed at 6.10% against 6.07% Monday, ending at its highest level since Feb. 13. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform rose to INR 652.95 billion from INR 504.60 billion Monday.

The five-year OIS rate fell to a low of 6.05% early in the day as traders unwound their paid fixed rate positions at a profit. However, the 10-year US Treasury yield surged to 4.30% by 1700 IST, a fresh four-month high, from 4.23% at the end of Indian market hours Monday. Traders expect US yields to continue rising amid increasing tensions between US President Donald Trump and European allies over the possession of Greenland.

"It's a very straightforward trade right now where US yields are going up and people are paying the five-year (OIS)," a dealer at a private-sector bank said. "Whether its onshore, offshore, everyone realises that the breakout on the upside (in the 10-year US yield) signifies that more paying is the way to go."

The 10-year US yield had traded within the 4.10-4.20% band between early December and Friday. Offshore activity in the OIS market has risen since Monday and has driven OIS rates to fresh multi-month highs despite no domestic rate cues. Domestic traders had already paid fixed rates earlier and some were unwinding those trades at a profit, especially near the day's high of 6.11% on the five-year OIS, dealers said.

No traders were receiving fixed rates aggressively as the Reserve Bank of India's Monetary Policy Committee was not expected to cut the repo rate any further from the current 5.25%. The rate-setting panel cut its policy rate by 125 basis points between February and December 2025. Its next action on the repo rate is seen as a hike, according to market participants, though that is only expected in 2027.

"These levels are looking good to take an exit also," a dealer at a primary dealership said. "Nobody would receive against the momentum, but the levels are looking more and more attractive as there is nothing fundamental to India in this rise in OIS. It/s not as if the RBI is hiking rates tomorrow."

Some traders said the steep OIS curve offered an opportunity to receive longer-term rates while paying the one-year OIS rate. However, there was no momentum to the trade as the five-year OIS rate is more sensitive to the US yield movement than the one-year OIS, while traders are not betting on a rate hike in India before December at the earlier. Already, the one-year OIS rate is pricing in a 25-bps rate hike in December, which is more aggressive than most traders anticipate, dealers said.

Despite the lack of a fundamental trigger, the one-year OIS rate also rose as traders hedge their fixed income holdings by paying OIS rates, dealers said. Some traders cited the attractiveness of buying a high-rated one-year commercial paper or certificate of deposit and hedging the exposure using the one-year swap rate, which offers a massive carry for a year. National Bank for Agriculture and Rural Development raised INR 100 billion through certificates of deposit maturing in one year at 7.22% Tuesday, offering an over-160-bps spread over the one-year OIS rate.

OUTLOOK

On Wednesday, OIS rates may take cues from the movement of US Treasury yields overnight. The increase in offshore activity in swap rates had led them to more closely track the offshore cue, especially amid a lack of domestic interest rate triggers, dealers said. The 10-year US Treasury yield hit a fresh four-month high above 4.30% after Indian market hours Tuesday. 

Traders are uncertain about the direction of OIS rates, especially after the five-year OIS rose past the key 6.05% level Monday. With most traders not betting on any further rate cuts in India, benchmark OIS rates may continue to rise to fresh multi-month highs, dealers said. The RBI's Monetary Policy Committee is expected to next take action on the repo rate by raising it early in 2027.

Domestic traders are expected to pay fixed rates below the 6.05% rate on the five-year swap. However, others may unwind their paid fixed rate bets at a profit, capping the rise. The five-year OIS rate is expected to trade in the 6.03-6.20% range in the near-term amid heightened geopolitical uncertainty and a rise in US yields. 

Traders will also monitor developments in the India-US trade negotiations, crude oil prices, and further geopolitical developments. On Wednesday, the one-year swap rate is seen at 5.48-5.62% and the five-year at 5.95-6.12%.

End

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

Edited by Deepshikha Bhardwaj

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