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Informist, Friday, Jan. 30, 2026

By Cassandra Carvalho

MUMBAI – Most overnight indexed swap rates ended lower Friday on bets that the Reserve Bank of India would continue to pump liquidity into the banking system, after the central bank conducted a second 90-day variable rate repo auction Friday. Mutual funds and other traders that bought gilts Friday hedged their purchases by paying fixed rates in swaps, which limited a fall in some tenures, dealers said. 

The one-year swap rate ended at 5.56% from 5.57% Thursday. The five-year swap rate closed at 6.16%, flat against the previous day. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 548.90 billion, up from INR 362.50 billion Thursday. 

Domestic traders received fixed rate contracts on bets of easing liquidity conditions after the RBI conducted its second 90-day VRR for a large size of INR 2.00 trillion Friday. Short-term bonds were sharply up on the announcement of the liquidity-infusing measure, and rates on certificates of deposit fell. At the first 90-day, INR-250-billion VRR auction conducted Friday, the RBI accepted bids worth INR 250.04 billion, while it received bids worth INR 950.62 billion. The cut-off rate was set at 5.34%, with a weighted average rate of 5.40%. After the RBI introduced a prepayment option for the 90-day VRR, demand at auctions of this tenure is seen robust amid a liquidity crunch in the banking system and elevated rates on CDs. The net liquidity absorbed in the banking system by the RBI – a proxy for the liquidity surplus – was INR 829.68 billion Thursday, up from INR 677.08 billion Wednesday.

"(In) OIS, there's just some receiving of 3-4 basis points from the domestic side after the (second) VRR, also because 6.18-6.19% (on the five-year OIS) is the resistance on the trendline. So until that holds we will see a downward move to 6.05%," a trader at a primary dealership said. "But if that (6.18%) breaks, then we'll see a much bigger move on the upside."

However, the fall in the five-year swap rate was offset as traders, especially mutual funds, bought the 10-year 6.48%, 2035 and 15-year 6.68%, 2040 gilts and hedged these purchases by paying fixed rate contracts in the five-year swap, dealers said.

"Mutual funds are probably buying the 15-year (gilt) and paying in five-year OIS," a dealer at a state-owned bank said. "That is usually what they do, above 6.10% they (had) unwound but now again it's (five-year OIS) above 6.15%, so they may be paying."

Traders paid fixed rates in the two-month swap rate to trim excess received-positions as the swap's maturity fell into the new financial year starting April. The two-month swap matures on Apr. 2. The rate ended at 5.41%, up 3 basis points from Thursday's close. A similar move was seen in the three-month swap rate in December, and is expected in the one-month swap rate next month, dealers said.  

OUTLOOK

Swaps are not traded Saturdays and Sundays. On Monday, overnight indexed swap rates will track the movement in bond yields after the Union Budget for 2026-27 (Apr-Mar) is presented Sunday. Traders await the Centre's market borrowing figures which will be detailed in the Union Budget. Albeit, swap rates may fall at open Monday after weekly statistical data released post-market hours showed that the RBI purchased gilts worth INR 126.55 billion outside open market operation auctions in the week ended Jan. 23.

The Centre's gross borrowing aim is expected to be between INR 16 trillion and INR 17 trillion, compared with INR 14.72 trillion in FY26. A higher-than-expected number may weigh on bond prices, while an increase in funding through Treasury bills or small savings and a gross borrowing number below INR 16 trillion would boost bond prices, dealers said. If the actual amount is significantly higher than INR 17 trillion, the yield on the 10-year benchmark bond will likely rise till 6.80%, dealers said.

The movement of swaps will hinge on offshore flows, as offshore traders continue to pay fixed rates, dealers said. After the Budget, traders await the outcome of the RBI's Monetary Policy Committee meeting next week, even though a rate cut is not expected, dealers said. Swap rates are currently pricing in rate hikes. 

Traders will also monitor developments related to the India-US trade negotiations, crude oil prices, and geopolitics. 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 Tanima Banerjee

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