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Informist, Thursday, Jun. 11, 2026

 

MUMBAI – The spread of the five-year overnight indexed swap rate over the two-year swap compressed to 23 basis points Thursday, the lowest since Aug. 18. Traders expect the swap rate curve to flatten further as they pay fixed rate contracts in shorter-term rates on bets of the Reserve Bank of India's Monetary Policy Committee raising the repo rate in 2026-27 (Apr-Mar), while longer-tenure swaps have scope to fall, they said.

 

"There is still that fear (of rate hikes) in people's minds, and OIS is pricing that in," a dealer at a private sector bank said. "The five-year OIS can fall lower; there will be volatility, but it will trend lower only."

 

The spread trade of paying short-term rates—such as the one-year or two-year swap--while receiving longer-tenures such as the five-year OIS has gained traction lately. The spread of the five-year swap over its one-year counterpart Thursday was at its lowest since Dec. 5, at 40 bps. The one-year swap rate is roughly pricing in three hikes in the repo rate of 25 bps each within 12 months. Some traders expect a rate hike as early as August. Twelve of the 20 market participants polled by Informist expect a status quo on the repo rate on Aug. 5. Short-term swaps are reflecting concerns of retail inflation rising above 5% due to elevated crude oil prices and a weak monsoon, dealers said. However, while swaps are on an uptrend, swaps are overpricing rate hikes, according to most dealers, making it lucrative to receive, they said. On the longer-end, receiving by mutual funds to maximise their returns on floating-rate corporate bond issuances has supported a fall. 

 

The flattening OIS curve is in sharp contrast with the government bond yield curve. The latter is seen steepening—wherein short-term yields fall faster than their long-term counterparts—as demand from foreign investors and domestic banks pulls down the shorter-end on expected capital flows after the RBI and Centre unveiled a slew of incentives last week to attract foreign flows. The five-year benchmark 6.36%, 2031 gilt yield, which briefly hit a two-month low of 6.49% this week, could fall further to about 6.25%-6.30% in the medium-term, some dealers believe. With strikingly different medium-term views on both the instruments, the spread between gilt yields and swaps could widen further, dealers said. The spread of the 10-year benchmark bond yield over the five-year OIS widened to about 50 bps Thursday, the most since Apr. 21.  End

 

Reported by Cassandra Carvalho

Edited by Deepshikha Bhardwaj

 

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