How an overnight index swap (OIS) works in India

When banks want to bet on, or protect against, changes in the RBI's interest rates, they often use an overnight index swap, or OIS. This page explains what an overnight index swap is, how it works and why markets watch OIS rates.

Quick answer

An overnight index swap (OIS) is an interest rate swap in which one party pays a fixed rate and the other pays a floating rate based on an overnight benchmark, compounded over the life of the swap. In India, the floating leg is usually linked to FBIL's overnight MIBOR. Only the net difference is paid at the end, and no principal is exchanged.

Key takeaways

• An OIS swaps a fixed rate for a compounded overnight rate.
• In India, the floating leg is usually overnight MIBOR.
• Only the net interest difference is paid.
• OIS rates show market expectations of RBI policy.
• Banks, foreign investors and companies use OIS to hedge or take views.

What is an overnight index swap?

It is a type of interest rate swap with two legs. The fixed leg pays an agreed rate for the whole period. The floating leg pays the average of an overnight interest rate over the same period, compounded day by day.

In India, the overnight rate used is usually FBIL's overnight MIBOR, which is based on interbank call money trades. Swaps can run from a few months to several years.

A simple example

Bank A agrees to pay a fixed 6 percent and receive overnight MIBOR on a notional amount of Rs 100 crore for one year. Bank B takes the opposite side. Over the year, MIBOR goes up and down every day.

At the end, the daily MIBOR rates are compounded. If the compounded rate works out to 6.2 percent, Bank A receives the difference of 0.2 percent on Rs 100 crore, which is Rs 20 lakh. If it works out to 5.8 percent, Bank A pays Rs 20 lakh. The Rs 100 crore never changes hands.

Why do markets watch OIS rates?

Overnight rates closely follow the RBI's repo rate. So the fixed rate on an OIS reflects what the market expects the average overnight rate to be over that period. If one-year OIS rates fall well below the current repo rate, traders may be expecting rate cuts.

This makes OIS rates a quick, market-based reading of policy expectations. Analysts often quote them before and after RBI policy meetings.

Who uses overnight index swaps?

Banks use them to manage the gap between their fixed rate assets and floating rate liabilities. Foreign portfolio investors and companies use them to hedge or to take positions on interest rates without buying bonds. Primary dealers use them alongside government bond trading.

RBI rules decide who can enter such deals and for what purpose. Most interbank OIS trades are cleared through CCIL, which reduces counterparty risk.

What is changing?

An RBI committee in 2024 suggested a benchmark based on the secured money market, called the Secured Overnight Rupee Rate (SORR), which FBIL now publishes. In late 2025, FIMMDA proposed a framework for SORR-based OIS. MIBOR-linked OIS remains the main contract for now.

OIS deals carry real risks, including losses if rates move against a position. They are mainly used by institutions with a clear hedging need.

Frequently Asked Questions