India Bond Market Sees Fresh Activity As OIS Rates Spike After Oil Rally

Interest-rate expectations are shifting in India’s debt market. One key change is rising interest in swap-linked strategies as overnight index swap (OIS) rates have moved up sharply. This has created fresh opportunities in the market.

Investors are now combining floating-rate corporate bonds with swap agreements to lock in higher yields in a rising rate environment. Some fund houses like Aditya Birla Sun Life Asset Management and DSP Asset Managers are already using this approach.

This shift is linked to broader global cues. Crude oil prices have risen due to the US-Iran tensions. That has increased the chance of higher interest rates ahead.

Last week, India’s 3-year OIS rate touched its highest level since 2023 as traders increased bets on tighter monetary policy and elevated inflation risks.

Markets are now pricing in rate hikes of about 125 basis points over the next year, MUFG Bank Ltd. said. But their base case is more modest. MUFG expects only around 50 basis points of increases.

Why Are Debt Fund Managers Turning To Swap-Based Bond Trades?

The attraction lies in the additional yield available through swap-linked structures.

According to market participants, investors are currently able to earn nearly 75 to 100 basis points more than regular bond yields by combining floating-rate bonds with swap contracts.

In these trades, investors typically buy floating-rate corporate bonds first. The interest payout on these bonds moves with benchmark rates such as the three-month Treasury bill yield, along with an added credit spread.

They then use overnight index swaps to convert the floating payout into a fixed return.

The strategy has become more attractive because swap markets are currently pricing in sharper rate hikes over the coming months. Activity has picked up particularly in the three-year segment, where OIS rates have risen the most recently.

Why Are More Companies Issuing Floating-Rate Bonds?

Borrowers are also changing their fundraising strategy as interest-rate expectations remain uncertain. Instead of locking into fixed borrowing costs, many companies are now opting for floating-rate bonds, where coupon payments adjust periodically based on market rates.

That structure becomes more favourable when yields are rising or expected to remain volatile. Since mid-May, at least 5 issuers have raised nearly 64 billion rupees through floating-rate notes. More issuances are already in the pipeline.

Cholamandalam Investment and Finance Co. and Muthoot Finance are expected to seek bids for up to 100 billion rupees worth of floating-rate bonds. Cholamandalam alone plans to raise around 50 billion rupees, which could become the largest floating-rate bond sale by a local lender in India.

Market participants said issuers are finding strong demand even in an otherwise difficult debt market environment.

What Is Driving Investor Interest In Floating-Rate Debt?

The current market setup is supporting both investors and issuers.

For investors, floating-rate bonds provide some protection against rising rates while swap agreements help capture higher fixed returns. For issuers, the structure also helps align liabilities with underlying business cash flows.

The broader trend also reflects growing caution across debt markets as investors reassess inflation risks, global oil prices and future central bank actions.

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For now, rising swap rates are creating a fresh opportunity pocket within India’s fixed-income market, particularly for investors willing to use more structured debt strategies.

Source:

Moneycontrol