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Informist, Tuesday, Jan. 27, 2026

By Cassandra Carvalho

MUMBAI – Overnight indexed swap rates recouped from their intraday lows and closed higher Tuesday as offshore traders continued to pay fixed rate contracts, dealers said, reversing optimism from the Reserve Bank of India measures announced post market hours Friday to infuse liquidity into the banking system. The five-year OIS rate rebounded from the day's low of 6.11% to rise above the key technical level of 6.17% level, triggering stop-losses for some participants, dealers said. 

The five-year swap rate closed at 6.18% against 6.14% the previous day, the highest closing level since Jan. 21, 2025. The one-year swap rate ended marginally down at 5.59% from 5.60% Friday. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 696.35 billion, from INR 724.90 billion Friday. The Indian financial markets were shut Monday on account of Republic Day. 

Early in the session, domestic traders, especially mutual funds, received rates after RBI announced a series of measures Friday, which included open market operation auctions totalling INR 1.00 trillion, a $10 billion, three-year dollar-rupee buy-sell swap auction, and a 90-day variable rate repo operation of INR 250 billion. Swap rates opened lower on hopes of the overnight Mumbai Interbank Offered Rate being set at or below the repo rate, after the RBI measures. The overnight Mumbai Interbank Offered Rate was set at 5.49% Tuesday. It has been set above the repo rate of 5.25% since mid-December. 

However, offshore traders paid fixed rate contracts in swaps. Non-deliverable OIS rates also inched higher from usually trading slightly lower than onshore rates, dealers said. Some traders speculated that an offshore hedge fund had hit stop-losses in swap rates, while others said that offshore traders were paying fixed rates in swap while selling gilts. A few said that offshore traders were purchasing gilts, and hedging the purchases by paying swap rates. Data from Clearing Corp. of India showed that foreign portfolio investors Tuesday net sold gilts worth INR 6.14 billion through the fully accessible route. 

"6.17% (on the five-year OIS rate) is the level that was important, and it seems like offshore has broken it," a dealer at a private sector bank said. "ND-OIS (Non-deliverable OIS) is also flat now, it used to be 2 basis points lower. Now ND-OIS will be higher than onshore (OIS), we've already seen that happen in Malaysia or one of the other Asian countries."

Domestic traders, who were on the receiving end of the offshore traders' contracts, chose to hedge their trades by either selling the 10-year 6.48%, 2035 gilt or by paying fixed rates in other contracts, dealers said. Domestic traders bet that the five-year OIS rate will rise further, to 6.23%, and subsequently 6.35%, dealers said. Some traders expect swap rates to fall briefly before rising again, and expect to play a "pay on dips" strategy. 

"I think there'll be a slight fall in OIS, and then there will be some retracement," a dealer at another private sector bank said. "Domestic will just follow a 'pay on dips' now because we don't see any sustained fall in OIS."  

On the monetary policy front, some traders feared that the RBI's Monetary Policy Committee has ended its rate-cutting cycle, after the RBI announced a 90-day variable rate repo auction, since its tenure crosses the February policy meeting and is likely to include the April policy meeting as well. However, post market hours Tuesday, the RBI said that traders participating at the 90-day variable rate repo auction it will conduct Friday will have the option of prepaying the amount borrowed, indicating that the MPC would still have the option of cutting rates. 

OUTLOOK

On Wednesday, overnight indexed swap rates may open lower, tracking a fall in gilt yields, after the RBI advanced the dates of its open market operation auctions by a week. The provision of a prepayment option for any amount borrowed at the 90-day variable repo rate auction is also likely to aid a fall in swap rates. However, the movement of swaps will hinge on offshore flows, as they continue to pay fixed rates, dealers said. 

Swaps may also take cues from the movement of US Treasury yields ahead of the US Federal Open Market Committee's meeting outcome. Traders will also monitor developments in the India-US trade negotiations, crude oil prices, and the global geopolitical situation. On Wednesday, the one-year swap rate is seen at 5.52-5.68% and the five-year at 6.03-6.25%.

End

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

Edited by Deepshikha Bhardwaj

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