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Informist, Monday, Feb. 2, 2026

MUMBAI – Overnight indexed swap rates maturing in up to a year ended lower Monday, while rates maturing in more than a year ended higher, leading to a steepening of the swap rate curve. Easing liquidity conditions, and bets of further liquidity infusions from the Reserve Bank of India pulled down short-term swaps, while longer-tenures tracked a surge in bond yields. However, swaps were off the day's high as levels were lucrative to receive fixed-rate contracts, dealers said.  

The one-year swap rate ended at 5.55% from 5.56% Friday. The five-year swap rate closed at 6.20%--the highest close since Jan. 20, 2025--from 6.16% the previous day. The swap hit a day's high of 6.24%. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform was INR 482.95 billion, slightly lower than INR 548.90 billion Friday. 

Bond yields surged Monday after the Centre proposed a record gross borrowing of INR 17.20 trillion for 2026-27 (Apr-Mar) at the Union Budget for FY27 presented Sunday. Bond traders were expecting a gross borrowing figure of INR 16.3 trillion, as per an Informist poll median of 30 economists, fund managers, and treasury heads. The yield on 10-year benchmark 6.48%, 2035 gilt rose seven basis points Monday, the most in a day since Aug. 18. The yield ended at 6.77%, the highest close in more than a year. Swap rates rose tracking this rise in bond yields, dealers said. Offshore flows were negligible, and most of Monday's movement in swaps was domestic-driven, dealers said. Mutual funds and corporates were active participants, and some were on the receiving side, dealers said. 

However, traders found current levels lucrative to receive fixed rate contracts, since swap rates are likely to fall in the near-term on bets of easing liquidity. The net liquidity absorbed from the banking system by the RBI – a proxy for the liquidity surplus – was INR 886.42 billion Sunday, down from INR 1.84 trillion Saturday. The overnight Mumbai Interbank Offered Rate was set at 5.28% Monday, the lowest since Dec. 12. 

"Tomorrow (Tuesday) or day after swaps will fall because liquidity will improve, we have an OMO (open market operation) auction and an FX (foreign exchange) swap which will infuse liquidity this week," a dealer at a private sector bank said. "But the fall won't be that much, now that we've broken the 6.18% (technical level on the five-year swap), the range has shifted upwards." The central bank will buy INR 500 billion of seven gilts at an OMO auction Thursday. The central bank will conduct a $10 billion, three-year dollar-rupee buy-sell swap auction Wednesday.

OUTLOOK

On Tuesday, overnight indexed swap rates will track the movement in US Treasury yields and Indian government bond yields. Traders will also closely track the systemic liquidity, and any indications of a liquidity infusion from the Reserve Bank of India. Later in the week, swap rates will track the outcome of the RBI's Monetary Policy Committee decision Friday. Traders do not expect the rate-setting panel to cut rates further, after cutting the repo rate by 25 basis points to 5.25% in December. Several participants see the terminal repo rate at 5.25%, with the MPC likely to opt for a "prolonged pause". Given the disruption to global trade and geopolitical conflicts, the MPC is unlikely to change its stance to "accommodative" after reverting to "neutral" in June, participants said. While nothing of significance is expected on the interest rate front, the focus is on the central bank's communication on liquidity at the post-policy announcement. Bond market participants expect at least INR 1 trillion of open market operation auctions to be announced at the MPC announcement Friday, along with assurance from the RBI Governor on continued liquidity infusions.

The movement of swaps will also hinge on offshore flows, as offshore traders continue to pay fixed rates, dealers said. 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 6.10-6.36%.

End

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

Edited by Deepshikha Bhardwaj

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