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Informist, Friday, Feb. 6, 2026

By Aaryan Khanna

NEW DELHI – Most overnight indexed swap rates ended higher even though the outcome of the Reserve Bank of India's Monetary Policy Committee was on expected lines. The lack of further liquidity infusion announcements by the central bank and a sharp rise in government bond yields pushed up the five-year swap rate, dealers said.

The one-year swap rate ended at 5.53% against 5.51% Thursday. The five-year swap rate closed at 6.19% against 6.09% the previous day, with the total notional trade volume on Clearing Corp. of India Ltd.'s derivatives trading platform at INR 698.00 billion against INR 939.40 billion Thursday.

Contracts maturing in up to three months ended slightly lower after the MPC voted unanimously to leave the repo rate unchanged at 5.25% and retained the policy stance at "neutral". The RBI also upwardly revised its CPI inflation and GDP growth forecasts, which some traders were expecting, and reduced hopes of further policy easing. The OIS market was not expecting a further rate cut by the RBI and did not have much of a reaction to the policy decision itself.

"In terms of the one-year swap, you can see that the RBI is not going to cut rates, but its not going to raise them either," a dealer at a private-sector bank said. "The governor committed to keeping rates low for a long time and where the market has some confidence on liquidity, it is possible to ease of some risk premium because he didn't announce anything negative."

The overnight Mumbai Interbank Outright rate was fixed below 5.10% for the third straight session Friday, well below the policy repo rate. After the policy outcome, traders expect the repo rate to remain at 5.25% in 2026 with the next action on rates a hike, likely in 2027. The RBI marginally increased its forecasts of CPI inflation and GDP growth in the coming quarters. 

The neutral stance of the MPC shows panel members expect interest rates to stay at current levels going ahead, RBI Governor Sanjay Malhotra said Friday. Interest rates are seen at "low levels" for a long time and the committee will take decisions to further rate cuts from "policy to policy", he said at the post-policy press conference.

Malhotra also said the RBI would be "pre-emptive" and "proactive" in its approach to liquidity management. The liquidity surplus in the banking system--as measured by the RBI's net liquidity absorbed Thursday--was above INR 2 trillion for the second straight day and is expected to rise further Friday from the settlement of durable liquidity infusion measures by the central bank. However, the lack of concrete liquidity measures announced at the policy meeting led to a sharp rise in gilt yields, compounded by a poor auction result.

The yield on the 10-year benchmark gilt rose 9 basis points to 6.74% Friday--its worst day in nearly six months--while the five-year benchmark gilt yield rose 6 bps. Moreover, traders placed bets that the five-year OIS would rise further after it rose past the psychologically crucial 6.15% mark. Some traders also bought gilts as the yields rose while paying swap rates, effectively betting on the spread of these instruments to widen, dealers said.  

"Paying pressure begins when the five-year moves up above 6.15% and there were also some stop losses today," a dealer at a primary dealership said. "Below that level, the positioning is that the market (5-year OIS) will go to 6.00%, but on the higher side it could go to above 6.20%. And there was no receiving support from offshore today (Friday)."

OUTLOOK

Swap rates are not traded Saturday. On Monday, OIS rates may open steady after the volatility following the monetary policy decision on Friday, dealers said.

With the MPC maintaining a status quo on the repo rate at 5.25% and policy stance at "neutral", as expected, traders wait for upcoming data prints in the domestic market. RBI Governor Sanjay Malhotra was seen hinting at a terminal repo rate at 5.25%, with the MPC likely to opt for a prolonged pause, dealers said. Traders expect overnight MIBOR fixings to remain near the policy repo rate going ahead.

Traders may also track movement in US Treasury yields, Indian government bond yields, crude oil prices and the rupee movement for direction on swap rates. The one-year swap rate is seen at 5.40-5.60% and the five-year at 6.05-6.28%.

End

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

Edited by Akul Nishant Akhoury

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