An Interest Rate Swap (IRS) is an OTC derivative agreement between two counterparties to exchange a series of interest payments based on a notional principal amount over a specified period. In the most common structure — a plain vanilla IRS — one party pays a fixed interest rate and receives a floating rate (typically linked to MIBOR, SOFR, or the RBI repo rate), while the counterparty does the opposite. No exchange of principal takes place. Indian corporates use IRS to convert floating rate borrowings into fixed rate obligations (paying fixed, receiving floating) to gain certainty on interest costs. Banks and financial institutions use IRS extensively to manage the interest rate risk in their balance sheets — particularly the mismatch between fixed rate assets and floating rate liabilities. The Mumbai Inter-Bank Offer Rate (MIBOR)-based IRS market is the most liquid segment of India's OTC derivatives market.
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