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Here’s something that’s happening in India right now: the RBI has been cutting interest rates, and yet, bond yields have been rising steadily for over a year. How is this happening?
Enter swap rates, which are tools that help two entities fix a benchmark rate and reap the interest rates of the other on the basis of that. And in today’s market, it is signalling positive returns for fixed-income investors.
India’s 10-year government bond yield is hovering around 7.1%. Swap rates are at multi-year highs. And for investors who know where to bet, this is turning out to be a lucrative entry point. Let’s break down exactly what’s going on.
Why Are Bond Yields Rising Even As the RBI Cuts Rates?
Most investors assume the following: RBI cuts rates > borrowing gets cheaper > bond yields dip. That’s not wrong, but it’s just a part of the picture.
The RBI’s repo rate controls short-term borrowing between banks. Bond yields are shaped by a varying set of forces altogether: supply and demand, global rate movements, and investor confidence.
Here’s what really happened:
- While the central government is managing to keep its expenses in check, state governments have been spending extensively on welfare schemes, election promises, etc.
- To fund these activities, they’ve been issuing substantial volumes of state bonds called SDLs (State Development Loans). What this means is they have been flooding the same market as the central government and major institutions, which in turn translates to more supply for the same pool of buyers.
- When supply exceeds demand, bond prices fall. And when bond prices fall, yields rise.
- Add into the mix the fact that US bond yields have also been seeing an upward trend in 2026, reducing the attractiveness of emerging markets like India for foreign investors.
Both these forces together are pointing in the same direction. The result: yields have climbed roughly 90 basis points in a year, even as the RBI continues to slash interest rates.
What Are Swap Rates and Why Do They Matter?
Think of it as a contract where two entities try to reap the benefits of the other’s interest payments in place of their own. One pays a fixed rate of interest, whereas the other pays a floating rate that is aligned with the market sentiment while receiving the same fixed rate.
The principal isn’t part of the transactions; no large sums of money change hands. They just simply agree to settle the difference between the interest rates over a period of time.
The specific type that is majorly used in the Indian market is called an Overnight Index Swap (OIS), which is in turn tied to MIBOR (Mumbai Interbank Outright Rate), which tracks closely with the RBI’s repo rate. So entering an OIS is essentially making a bet on which direction the RBI’s policy will head in.
Here’s why swap rates matter so much: the fixed rate that both parties agree to today reflects the market’s expectations regarding where the overnight rate will average over the life of the swap. In simple terms, it is the bond market’s forecast of RBI policy. When the 5-year OIS rate is at a high, as it is currently, the market is basically saying that we expect the rate to stay high for years, not weeks or months. That is a signal with a lot of weight behind it.
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What “Fixed Paying” and “Fixed Receiving” Actually Means
Every swap has two sides, and understanding the difference is crucial for you as an investor.
| Criteria | Fixed Payer | Fixed Receiver |
| What you pay | A fixed rate | A floating rate (MIBOR) |
| What you collect | A floating rate (MIBOR) | A fixed rate |
| What are you betting on | Rates will rise | Rates will fall |
| When do you profit | MIBOR climbs above the fixed rate | MIBOR falls below the fixed rate |
| Risk | If rates fall, you pay | If rates rise, you pay |
Currently offshore players are paying fixed heavily, signaling that they expect Indian rates to go higher. The opportunity for most investors lies on the other side of this: receiving fixed at today’s towering rates and benefiting if and when the RBI eases up.
Where Is the Actual Investment Opportunity and Who Can Access It?
Swap contracts are usually institutional: banks, large foreign investors, and large companies are the ones engaging in OIS trades. Retail investors cannot be party to them. But swap rates are a signal for everyone, and the opportunity they present can be leveraged by everyone through the right instruments.
Here’s how you can act on it:
- Corporate bonds and NCDs: AAA-rated bonds are currently offering yields from 7.5-9%. Platforms like GoldenPi give you an entry with low minimum investments to boot.
- Target Maturity Debt Funds: These are mutual funds that hold bonds maturing in a specific year. They help lock in today’s soaring yields for investors who stick around till maturity.
- Fixed Maturity Plans (FMPs): These are mutual funds with a locked-in end date. The fund manager raises money and buys a collection of bonds that mature around the same end date and hold them. Simply collecting the coupons, waiting for maturity, and returning the principal.
- RBI Retail Direct: It is an RBI-owned platform that allows investors to purchase government bonds directly.
What Are the Risks of Investing When Rates Are Rising?
- An RBI rate hike is being anticipated ahead of the June 2026 monetary policy meeting. If you need to sell before maturity, you’ll be open to facing losses.
- If state governments continue to borrow as heavily as they are right now, the crowding in saturated markets could cause delays in any meaningful yields.
This makes it a viable strategy for a patient investor—someone who is willing to put their bets in now and wait until the term ends without worrying about actively managing the risks.
Frequently Asked Questions: Swap Rates in India
A: In an OIS contract, one party pays a fixed interest rate and receives a floating interest rate that is linked to the MIBOR (India Overnight Lending Rate). There is no exchange of principals, just the difference in interest payments that is settled at the end of fixed periods. The OIS rates are closely monitored as they serve as a real-time, money-backed prediction of the future course of action of the RBI’s repo rate.
A: The RBI’s repo rate impacts short-term borrowing rates only. Long-term bond yields are based on the supply and demand for bonds. To compensate for growing fiscal deficits, state governments have been issuing a massive number of SDL bonds, creating an oversupply in the market. At the same time, the interest rate on US Treasury bills has been high, dampening demand for Indian bonds. Yields have risen on both, despite a cut in the policy rate by the RBI.
A: Yes — indirectly. While only institutional buyers are eligible to participate in swap deals, corporate bond yields, NCDs, target maturity debt funds, FMPs, and the RBI Retail Direct platform offer retail investors the opportunity to invest in bonds with similar yields.
A: Current yields are currently historically high for investors with a medium- to longer-term outlook. The immediate threat is rate hikes: If the RBI increases rates, bond prices may drop further and may not bounce back. Those who invest and keep the money invested for the entire duration are not affected by the price volatility but just enjoy the locked-in yield.
A: The yield of a bond is also based on the price paid for the bond, its coupon, and its term-to-maturity. Rising interest rates affect bond prices because they often raise yields. In turn, rising yields can trigger a short-term drop in the value of your existing bonds.
Mortgage lenders use the 5-year swap rate to help price 5-year fixed-rate mortgages. If the 5-year swap rate goes up, it means financial markets expect rates to stay higher for longer, making 5-year fixed-rate mortgages more expensive.
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Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Fixed Deposit schemes are regulated by the Reserve Bank of India. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
