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Informist, Tuesday, Feb. 3, 2026

By Aaryan Khanna

NEW DELHI – Overnight indexed swap rates ended sharply lower Tuesday as traders unwound their paid fixed rate bets after India and the US agreed to a trade deal late Monday. The fall in the five-year swap rate to under 6.14% triggered stop losses for some traders, dealers said.

"Stop-losses were hit for both onshore and offshore (traders)," a dealer at a private-sector bank. "We all know the reason – with the trade deal, it is more likely that the five-year goes to 6.05% than 6.50% after the policy (Monetary Policy Committee's meeting ending Friday)."

The one-year swap rate ended at 5.52%, down from 5.55% Monday. The five-year swap rate closed at 6.12%, down over 7 basis points -- its biggest fall since Aug. 4. On Monday, the five-year swap rate was at 6.20%, closing at its highest in over a year. The total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform nearly doubled to INR 836.40 billion from INR 482.95 billion Monday.

India and the US began negotiations on a bilateral trade deal in March, which had stalled across several months. On Monday, US President Donald Trump announced on social media that the reciprocal tariff rate on India's exports to the US would now be 18%, against the 25% imposed in early August. There was no official clarity on whether India's exports would still carry the 25% penal tariff introduced by the US around end of August, which had effectively led to tariffs of 50% on India's exports.

The rupee Tuesday had its best day in years against the dollar, zooming to 90.27 a dollar from 91.51 a dollar Monday. Hopes of the rupee appreciating further as exports pick up and foreign portfolio investors pile into equities will likely continue to draw offshore traders to receive OIS rates between two and five years, dealers said. A rise in the five-year OIS rate to the 6.18-6.20% band was going to be difficult after the stop-losses hit Tuesday, they said. 

"It's a very clear sign. India's rates will become attractive if the rupee stabilises or becomes stronger, so the offshore crowd is going to come back in," a dealer at a primary dealership said.

However, dealers' expectations on the Reserve Bank of India's liquidity management and monetary policy actions were mixed. Some said the central bank may not announce further liquidity infusion operations in the coming week after the deal was struck. The influx of dollars is expected to increase rupee liquidity in the domestic banking system.

Others received rates maturing up to a year after the overnight Mumbai Interbank Outright Rate – the floating leg of the OIS contract – slumped due to surplus liquidity in the banking system. The MIBOR fell to 5.13% Tuesday from 5.28%, below the repo rate of 5.25% for the first time since Dec. 12. It also hit its lowest level since Aug. 4, 2022. Traders said that even with no fresh operations, the RBI will likely commit to maintaining surplus liquidity in the banking system over the next few months to better transmit repo rate cuts that took place from February to December last year.

The RBI's MPC is not expected to cut the repo rate either at its three-day meeting that begins Wednesday or in the rest of 2026, with growth on a firmer footing. Bank of America changed its call from a rate cut to a pause Tuesday after the trade deal was announced. The one-year swap rate is pricing in the slight chance of a rate hike in December this year or February 2027, dealers said.

OUTLOOK

On Wednesday, OIS rates will likely fall further due to heavy surplus liquidity and low MIBOR rates, dealers said. Offshore investors and traders are expected to step up investment in India's assets, which may also drag OIS rates lower.

Traders may also 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 RBI. Traders also look forward to the outcome of the RBI's MPC 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 even after the trade deal, 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.

Crude oil prices, the rupee's movement against the dollar, and geopolitical tensions may influence swap rates. The one-year swap rate is seen at 5.40-5.60% and the five-year at 6.00-6.20%.

End

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

Edited by Ashish Shirke

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