Receiving Swaps Outperforming Bond Investments in India, Says BNP Paribas Executive

By Dharamraj Dhutia

MUMBAI – Indian investors are advised to focus on receiving positions in overnight indexed swaps (OIS) rather than initiating new long positions in bonds. A representative from BNP Paribas indicates that the potential returns from OIS are likely to surpass those from bonds once the global trend of interest rate cuts begins.

Interest rates around the world have remained high as various countries concentrate on managing inflation. However, there are indications that an easing cycle is approaching.

The US Federal Reserve is widely anticipated to announce rate cuts in its upcoming meeting.

Chandresh Jain, an Asia rate and FX strategist at BNP Paribas, mentioned that historically, INR swaps tend to perform better during periods of rate cuts compared to bonds. He also pointed out that the market already carries long positions in bonds, which may result in underperformance during upcoming rallies.

Currently, India’s five-year OIS rate is approximately 5.98%, while the yield on the 10-year benchmark 7.10% 2034 bond stands at 6.82%, reflecting a spread of over 80 basis points. The five-year OIS rate has decreased by over 40 basis points since the beginning of the quarter, whereas the bond yield has dropped by 18 basis points during the same period.

Jain predicts that bond yields and swap rates will continue to decline, although he expects the spread to widen, possibly reaching between 90 and 95 basis points over the next three months.

The markets are currently factoring in an aggregate of 175 basis points in potential easing by the Fed over the next six months. Jain anticipates that the central bank will implement five rate cuts of 25 basis points each by March. He also predicts a more modest reduction of 50 basis points by the Reserve Bank of India in the same timeframe. While Jain finds the outright receiving of Indian OIS appealing, he recommends waiting for a more favorable entry point.